www.hcltech.

com

TM

Banks and the Digital

Wallet Conundrum

whitepaper

May 2014

Banks and the Digital Wallet Conundrum

May 2014

TABLE OF CONTENTS
Executive Summary

Customers and the Need

Market Place and the Players

Banks and the Digital Wallet Opportunity

Conclusion 7
authors 8
References 8
About HCL

2014, HCL Technologies. Reproduction Prohibited. This document is protected under Copyright by the Author, all rights reserved.

Banks and the Digital Wallet Conundrum

May 2014

Executive Summary
As the payments industry evolves and accelerates, growth in mobile and electronic
payments is generating a lot of interest. With an expectation of significant uptick
in volume and value in the years to come, the market remains attractive for diverse
entities in the payments eco-system.
E-Commerce & m-Commerce is an important constituent of electronic and mobile
payments, and digital wallets leads in mindshare amongst market players. The progress
made by leaders in online payments such as PayPal, and the low entry barrier has
resulted in the proliferation of new launches.
Most banks have remained in the background of all these developments and have
not created the buzz, given their hold on the value chain. As the adoption of the
digital wallet increases, it is the right time for banks and financial institutions to begin
charting their journey or run the risk of being left behind.

Customers and the Need

Digital Wallets are increasingly

becoming Money Managers,
Shopping Advisors and not just
Value Containers
Proliferation of smart phones and high availability of the Internet has fuelled a drastic
change in the behavior and the mindset of customers. Mobile payments are a natural
extension of this behavior and consumer interest in mobile payments and particularly
at the point of sale remains high.
As smart phones turn in to digital wallets, it is vital that the devices ability to provide
a wholesome experience is leveraged. Integrating POS payments with value added
services such as Deals/ Offers, Special Merchant Promotions, Loyalty management,
Shopping Advice/ Product comparisons, In-store navigation aids, are defining the
future of mobile payments and digital wallets. However, its success depends on
relevance and timing, and in being least intrusive.
If digital wallets are to replace traditional wallets, it has to go beyond the shopping
experience. Wallet usage and spending patterns are driven by multiple behavioral traits
that a digital wallet can help codify. The innovators in the digital wallet space are
driving and helping to build customer expectations.
Despite the hype, consumer adoption is very low. This could be due to the lack of
acceptance, usage difficulty, non-availability of a trusted source and feature limitations.
However, PayPal and Starbucks have demonstrated that the market has a tremendous
potential.

2014, HCL Technologies. Reproduction Prohibited. This document is protected under Copyright by the Author, all rights reserved.

Banks and the Digital Wallet Conundrum

May 2014

Market Place and the Players

Innovation, Adoption and

Acceptance are critical
for leading in a
fragmented market
The nature of the wallet technology has provided opportunities for diverse entities
to participate in the market. The battle lines are clearly drawnmerchants and
service providers on one end of the spectrum, banks, financial institutions, and card
associations at the other end. With organizations such as PayPal and technology
companies in the mix, it is an exciting marketplace.
Retailer Applications (Apps)
Payment applications of select retailers have been extremely successful in driving
adoption, for example, the closed loop mobile app of Starbucks has been a roaring
success. The company has reported that more than 30% of its US payments are
through Mobile & Gift cards. With a patronage of 10 million customers and 5
million payments per week, the mobile app has helped its cause.
As the industry debates the pros and cons of retailer apps, it has certainly made a
mark. A deep understanding of the customer combined with significant rewards
and promotions has helped retailers gain a competitive advantage by providing a
better shopping experience and improving loyalty. In addition, it has helped them
to relegate the other players. However, being a closed loop payment, acceptance
will be limited and will hamper growth.
Merchant Consortium Wallets
Multi Commodity Exchange (MCX) the cross industry consortium has
generated a steady stream of news. The US based consortium with close to 60 big
names including airlines, convenience, department and drug stores, and names
such as Walmart, Target, CVS, and Southwest Airlines are amongst the keenly
awaited launches. With Cloud based mobile technology from Paydiant and
Gemaltos Allynis solutions for connecting to retailer apps and FIS for payment
processing, the app is very promising. However, it only remains a promise.
Service Providers
Uber the company that started as an on-demand, luxury black car service in 2010,
has grown by leaps and bounds, and has recently launched its service in Beijing
(100th City). It uses Google Wallet to power its payment application and despite
multiple setbacks and legal battles, the service marches on.

2014, HCL Technologies. Reproduction Prohibited. This document is protected under Copyright by the Author, all rights reserved.

Banks and the Digital Wallet Conundrum

May 2014

Mobile Network Operators

Mobile network operators in partnership with banks have been very active in
Europe. Based on Near Field Communication (NFC) technology, multiple players
have launched their services. Telenor, a Norway based operator has partnered with
DNB to launch a digital wallet under the Valyou brand. Telefonica and Vodafone
in partnership with La Caixa a Madrid based bank, launched commercial
payment services using NFC technology.
Card Associations
MasterCard with its initial launch of Paypass Wallet Services in 2012, and
MasterPass suite of services in 2013, has a comprehensive offering in the digital
wallet services space. With 30,000 merchants accepting the Masterpass checkout
services and growing number of bank partners, MasterCard is making its presence
felt. MasterCard connected wallets, a collaborative proposition that enables banks
white label and offer their own digital wallet. This offering combines the trust
established by the bank with their customers MasterCards strength in technology,
payment processing and merchant acceptance.
Visas V.me digital wallet, marks its foray into the digital payments space. This is
a remote payment offering, which enables e-commerce and m-commerce and has
been launched in US, Canada and Australia. Visas payWavea NFC payment
technology, is an enabler for third party wallet providers.
The collaborative potential is one of the primary advantages that card associations
bring to the market place. Along with the banks, they have the ability to tilt the
balance in their favor because they command trust and provide a sense of security,
which is paramount in financial transactions.
Technology Players
If theres one company that garners big attention in the mobile payment market,
it is PayPal. A leader in online payments, its redesigned digital wallet has features
that transform the wallet experience. The wallet allows definition and usage of
alternate funding sources such as Gift card, loyalty points and coupons. It allows
you to define the rules that dictate spending pattern and source of spending.
Other notable features include ordering ahead, paying at the table and in-store
payments. Most importantly, PayPals digital wallet has generated significant
brand recall and consumer trust in the marketplace. Multiple surveys conducted
amongst different groups of respondents for rating digital wallet offerings have
one thing in common PayPal. It is amongst the top 2 in trust and preference for
usage. It is a just reflection of the annual mobile transaction volume processed by
PayPal in 2013 - $27 billion, close to a 100% increase from the preceding year.
Google Wallet packed with features is making a slow progress in the market
place. This could be partly due to its reliance on the NFC technology. Similarly,
infrastructure issues and lack of support from Apple have been major stumbling
blocks. However, the launch of Google wallet powered by Bluetooth Low Energy
could facilitate better adoption.

2014, HCL Technologies. Reproduction Prohibited. This document is protected under Copyright by the Author, all rights reserved.

Banks and the Digital Wallet Conundrum

May 2014

Banks and the Digital Wallet Opportunity

Digital Wallets Enabling the

relevance of Banks
Banks, the traditional custodians of money, have been on the sidelines of the digital
wallet market space. As the industry and the offerings mature, the importance of being
a relevant player is of critical importance. While the low adoption of digital wallets
has shielded the banks from adverse impact, the risks of continuing to be an observer
are increasing.
The following threats can have a significant impact on the way banks operate:
yy Emergence of alternate players Migration of funds from the bank accounts to the
digital wallets as a value container platform.
yy Interchange revenue loss Shift from card based payments to Automated Clearing
House (ACH) based pull payments.
yy Relegation as a last mile processor Banks may be reduced to a backgroundprocessing unit that moves funds in the last mile.
yy Data loss Digital wallet providers may withhold customer transaction data from
the association and the issuers, thereby shielding valuable data.
yy Brand and loyalty Loss of trust and the loyalty of the customers.
The good news is that the banks have not missed the bus yet. The digital wallet market
is picking up and the opportunity in front of them is compelling. There are quite a few
factors that favor the banks to gain a strong foothold.
Customer Trust When it comes to money, customers trust banks. Multiple
surveys from leading industry watchers say this in unison.
Financial Data Access to customer accounts and financials enable banks to
provide a wholesome wallet. They are in the best position to extend ancillary
services such as controls on spending patterns and sources. In combination with
the financial advisory services provided by them, banks possess a powerful armory.
Relationship with Card Associations Banks and Card associations are natural
partners. Both have been threatened by the emergence of alternate players and the
market. MasterCards MasterPass is a collaborative platform that banks can adopt
to develop digital wallets without making large investments.
Single Source with Wider Acceptance It is a challenge for merchant wallet
platforms to promote adoption. Banks in partnership with card associations will
find it much easier to drive acceptance across multiple retailers and merchant
sites.
Natural Extension of the Digital Strategy Most banks have a digital presence
in some form and process digital payments. Digital wallet as a value container
is the next logical step. It facilitates ease of adoption and can help customers
graduate to digital wallet.
2014, HCL Technologies. Reproduction Prohibited. This document is protected under Copyright by the Author, all rights reserved.

Banks and the Digital Wallet Conundrum

May 2014

Value Added Services As card issuers, banks are already promoting various
types of offers and deals. The presence of this infrastructure will enable the banks
to provide and improve the service through a different medium.

Conclusion
Banks considering a digital wallet journey have to consider the following
critical factors:
Entry Strategy The foundation for a successful digital wallet is adoption, usage
and acceptance. As far as banks with sound digital platforms are concerned,
adoption is the least of their problems, because they already have an active digital
base. The promotion of usage and adoption presents a key challenge in the form
of merchant acceptance.
A partner led strategy helps overcome this issue. Partners in the form of card
associations and other digital wallet enablers have platforms that have either
been in use for some time or have the backing of a powerful network for driving
acceptance.
Enablers and Partners come with a variety of options including white label and
plug-in options. Large banks have entered the market with their own branded
wallets that helps them to control branding and customer experience. Given the
challenges, banks must be sure of adoption and acceptance before choosing this
path.
Positioning The emergence of diverse entities is changing the payments
landscape drastically. Evolution of technology and disruptive innovation may
alter the ecosystem in a manner that may leave a lasting negative impact on the
banking industry. Banks should be mindful of this and come out with compelling
propositions for customers that ensure that the traditional model and relevance
is protected.
Agility Technology is a core component in all things digital. Similarly, in digital
wallets, it comes in multiple variants. In selecting a technology, it is important
to take into factors such as ease of adoption, wide-scale acceptance, and future
proofing are critical. Significantly, what is right today may not be for tomorrow,
therefore technology must be evaluated based on its agility to adapt.

2014, HCL Technologies. Reproduction Prohibited. This document is protected under Copyright by the Author, all rights reserved.

Banks and the Digital Wallet Conundrum

May 2014

authors
Kiran Tappita, Banking Solutions
kiran.tappita@hcl.com
Kiran Tappita is, Banking & Payments Solutions lead for HCL
America, and drives the business solutions unit. A seasoned
business leader and banking expert, specializing in strategizing and
defining the roadmap for large transformational and modernization
initiatives for financial institutions.

Barath Gopalan, Banking Solutions

barath.g@hcl.com
Barath Gopalan, Practice Manager, HCL Technologies, specializes
in core systems transformation in the lending and payments
domain. As a solution leader, he works with clients on Innovation,
Value creation, Solution conceptualization & implementation in
the niche domains.

References
http://www.mobilepaymentstoday.com/articles/starbucks-reports-continued-growthin-mobile-app-usage/
http://www.digitaltransactions.net/news/story/3947
http://www.paymentssource.com/gallery/8-pieces-to-the-mcx-merchant-mobilewallet-puzzle-3016982-1.html
http://www.cnet.com/news/uber-launches-in-beijing-eyes-more-growth-overseas-q-a/
http://thefinanser.co.uk/fsclub/2014/03/digital-wallets-will-process-all-the-moneyon-earth-by-2025.html
http://press.lacaixa.es/caixabank/press-releases/la-caixa-launches-its-digital-walletcaixawallet-a-new-universal-payment-system-for-online-purchases__1775-c15347__.html
http://newsroom.mastercard.com/press-releases/mastercard-introduces-masterpassthe-future-of-digital-payments/
http://investor.visa.com/files/doc_downloads/annual%20meeting/Visa%20
Annual%20Report%202013%20final%20website.pdf
http://venturebeat.com/2012/03/13/paypal-shows-off-digital-wallet/
http://www.statista.com/statistics/277819/paypals-annual-mobile-payment-volume/
http://appleinsider.com/articles/13/09/19/nfc-free-google-wallet-debuts-on-applesiphone
http://www.forrester.com/Craft+The+Right+Digital+Wallet+Strategy+
For+Your+Financial+Institution/fulltext/-/E-RES99583
McKinsey Report From Solutions to Adoption: The next phase of consumer
mobile payments.
Celent Report Top Trends in Retail Payments A Year in Review 2014
2014, HCL Technologies. Reproduction Prohibited. This document is protected under Copyright by the Author, all rights reserved.

10

About HCL
About HCL Technologies
HCL Technologies is a leading global IT services company working with clients in
the areas that impact and redefine the core of their businesses. Since its emergence
on global landscape after its IPO in 1999, HCL has focused on transformational
outsourcing, underlined by innovation and value creation, offering an integrated
portfolio of services including software-led IT solutions, remote infrastructure
management, engineering and R&D services and Business services. HCL leverages
its extensive global offshore infrastructure and network of offices in 31 countries to
provide holistic, multi-service delivery in key industry verticals including Financial
Services, Manufacturing, Consumer Services, Public Services and Healthcare & Life
Sciences. HCL takes pride in its philosophy of Employees First, Customers Second
which empowers its 90,190 transformers to create real value for the customers.
HCL Technologies, along with its subsidiaries, had consolidated revenues of
US$ 5.2 billion, as on 31st March 2014 (on LTM basis). For more information,
please visit www.hcltech.com

About HCL Enterprise

HCL is a $6.5 billion leading global technology and IT enterprise comprising
two companies listed in India HCL Technologies and HCL Infosystems.
Founded in 1976, HCL is one of Indias original IT garage start-ups. A pioneer
of modern computing, HCL is a global transformational enterprise today. Its
range of offerings includes product engineering, custom & package applications,
BPO, IT infrastructure services, IT hardware, systems integration, and
distribution of information and communications technology (ICT) products
across a wide range of focused industry verticals. The HCL team consists of over
95,000 professionals of diverse nationalities, who operate from 31 countries
including over 505 points of presence in India. HCL has partnerships with
several leading global 1000 firms, including leading IT and technology firms.
For more information, please visit www.hcl.com

Hello there! I am an Ideapreneur. I believe that sustainable business outcomes are driven by relationships nurtured through
values like trust, transparency and flexibility. I respect the contract, but believe in going beyond through collaboration,
applied innovation and new generation partnership models that put your interest above everything else. Right now 95,000
Ideapreneurs are in a Relationship Beyond the Contract with 500 customers in 31 countries. How can I help you?