A digital wallet could be a commodity with maybe some branding and fashion – similar to physical wallets today.
In this scenario, we will have thousands of digital wallets.
Or a digital wallet could become your mobile bank – the one thing you never leave home without – that completely changes our concepts of money and banking.
In this scenario, we could have only two wallets – one from Apple and the other from Android.
Sorry Microsoft, I should have said three.
Bias alert. I use an iPhone. I am not wedded to iPhone. I was a happy Blackberry user and I will switch to anything better. However today I have the iPhone habit, so my digital wallet example will be an iPhone example.
Passbook is the digital wallet that I use regularly. I use Passbook to keep airline boarding passes as a convenience to save pulling up the boarding pass sent via SMS because I need offline access at the boarding gate. I do the same with car reservations. This is classic digital wallet use – storing what used to be bits of paper shoved in a physical wallet. If merchants gave me loyalty cards in Passbook form I would use them more often.
I do not use Passbook to store money. Or Credit Cards. Or Drivers License. So I leave home patting my pockets to make sure I have my iPhone and my physical wallet (and my passport if I am going on a foreign trip).
Before getting to money, let me tell you about one other thing that I do not put in Passbook – my train tickets.
I keep my train tickets in my SBB app. This is a mobile app from Swiss Railways. This passes the toothbrush test. I use it on average about twice a day (it includes local trams and buses). It is an example of why User Experience rules. It works so well that I use it a lot. So I keep my train tickets there. Putting train tickets into Passbook is easy but it is an extra step with no added value.
If I switched to an Android or Microsoft powered phone one of my first downloads would be the SBB app.
User Experience is King & Queen.
I am not raving about the SBB app as a segue to a Eurotrash rant about how good public transport is in Switzerland. Swiss trains are great, but the point is about User Experience. A truly great travel app would pass the toothbrush test and would be independent of the physical transport. Citymapper comes close, but coverage is still not widespread enough. Citymapper passes the toothbrush test when I am in London (or one of the other cities they now cover). I wish that I had invested in Citymapper when I first started using it and found it to be a much better experience than anything else I had ever used for travel. It was like my SBB app for all the other places.
When using Citymapper in London, I am also using my Oyster Card, which is simply a single purpose pre-paid wallet. Oyster Card now offer a mobile alternative, so that I will be putting my phone on the reader just as I do with my boarding pass in Passbook.
What if I had the equivalent of Oyster Card for New York and Paris as well? Or any other city with public transport. I surely don’t want the hassle of buying individual tickets or storing a number of plastic cards and making sure they are loaded with cash.
If you live in a city with lousy public transport and/or you think that public transport is only for poor people, Uber may pass the toothpaste test for you. Or, if you don’t like Travis Kalanick, maybe you use Lyft every day. I happen to be a fan of public transport and believe that “A developed country is not a place where the poor have cars. It’s where the rich use public transportation.”
This is Daily Fintech, so let me bring the subject back to money.
The key point about money is that it is boring.
Money is necessary, but so is broccoli. If you don’t have enough, money can be your top concern, but that makes it necessary and that is not the same as interesting. Making money can be interesting and money does enable interesting experiences, but money itself is boring.
In the physical world, where we keep money is also boring; no I do not want another wallet for Father’s day!
The hype about digital wallets have crashed against the rock of consumer apathy because there is only one thing more boring than money and that is where we keep our money.
Our physical wallets do pass the toothbrush test; we use or wallets at least twice per day. Yet our physical wallet has very little value. Search for cheap wallets and you get plenty of choices under $20. Keep it for 5 years and that is an annual cost of $4. Cheap probably means gross margins around 10% for the manufacturer. Don’t send me a business plan based on those unit economics.
Of course a digital wallet is zero cost on a unit basis. So Freemium is the obvious strategy and that is where Pre Paid Digital Wallets are going. Yet millions of free apps compete for our attention and unless they pass the toothbrush test, they become part of the mobile landfill of downloaded apps that we almost never use and so the developers never get a chance to sell us the Premium in Freemium.
This comes back to what Banks need to do to become relevant again in our lives. Last week I wrote about how Banks need to create great User Experience and there was some interesting debate on Twitter around two threads:
- UX ≠UI, meaning that a slick front end is no more than lipstick on a pig. True.
- Very few banks have ever built a truly great User Experience. Again true.
Nobody ever said this would be easy. Building a truly great User Experience that passes the toothbrush test is hard. Transforming banks to make them relevant to our modern digital lives is hard. Yet the prize is huge and failing to remain relevant to our lives will mean that Banks will go bankrupt (at huge cost in social disruption). So Banks need to try and they have the means at their disposal.
Payments are one way that Banks can remain central to our lives.
Payments is the boulevard of broken dreams. It is a massive market. Banks handled $410 trillion (yes that is a T) in non-cash payments in 2013 as per BCG. Yet most payments ventures crash against the rock of consumer apathy – credit cards, debit cards and cash work just fine (OK, mag stripe cards in America are messed up, but America will catch up to the rest of the world with chip and pin in the not too distant future and in the meantime most consumers are insulated from the problem).
Yet a couple of payments ventures have created Decacorn levels of value in a few short years. Think of Uber and AirBnB. The obvious retort is that they are travel ventures not payment ventures. Yet the reason that both sides in the transaction use services like Uber and AirBnB is that they enable payments in a relatively low friction way.
Uber and AirBnB are payment ventures dressed up as travel ventures.
Just like Amazon is a payments business dressed up as a shop and iTunes is a payments business dressed up as a music label.
Banks need to become central again in the lives of consumers. To do this they need to forget about their glorious history and focus on the future. The glorious history goes something like this:
- 1.0: Safe place to store assets. With guys like Butch Cassidy and the Sundance Kid around, Banks had to be pretty good at this. There is still some room for banks to innovate in this today around Bitcoin, because nobody has a way to store Bitcoin that is both safe and convenient. Safe Bitcoin storage will appeal to all those who view their Fiat printing governments as the modern version of Butch Cassidy and the Sundance Kid. However, a safe place to store assets hardly makes banks central to our lives (unless you are the sort of person who gets a kick out of watching their safe and imagining what is inside it).
- 2.0: The only place you could borrow money, withdraw cash or make/receive payments. You might not have loved going to your Bank branch, but you did it because there was no alternative. The Fintech revolution has made it abundantly clear that consumers do have alternatives.
The 3.0 future is when the Bank comes to you to be useful and relevant within context to what you are doing. In all the earlier generations of retail banking technology, you went to the Bank. Initially you went to a physical branch. Then you went to a physical ATM. Then you went to the Bank website. You went to the Bank. In 3.0, the Bank comes to you. The Bank might come to you physically via a Business Correspondent model (India) or via a Local Banker model in the West (Civilised Bank in UK). Or the Bank may come to you digitally on your mobile phone to enable whatever you want to do at that time that involves money.
It is in the mobile arena that Banks could create breakthrough services to make them once again central to their users lives. These services might be travel services or something else that we do on a regular basis where we need to spend money frequently with people and businesses that we do not have any relationship with – which is a classic description of a market looking for a trusted intermediary.
Imagine a travel app that had a trusted payment mechanism from a regulated bank. Critically, that trusted payment mechanism includes a pre-paid digital wallet so that users have off-line access to funds for small payments (in other words, transactions that we have historically use notes and coins for). The Bank could borrow from the Bitcoin concept of hot and cold storage (with cold storage being in a digital version of those 1.0 vaults and used to quickly, simply and safely re-fill the hot storage that we use for everyday spending).
Let’s get back to our traveler.
You used a train to get to a plane to a train to a taxi to a walk. Then you found a coffee shop with a promotion and a flower shop to buy some flowers for the person you are visiting. The app enabled all these transactions, while keeping your loyalty points and alerting you to budget limits and keeping track of your expenses. The app might use services such as SBB app, Citymapper, Uber, AirBnB and Foursquare via APIs. The company providing that service would feel central to my life. It is an example of an integrated User Experience that uses lots of best of breed point solutions via APIs that I wrote about last week.