Q&A: Fintech expert: digital wallets need this tech ‘magic’ or they’ll fail

Bank after bank has unsuccessfully tried to compete with the likes of Apple Pay, Google Pay, PayPal, and other established digital wallet players. And now, a consortium of US banks, including three of the largest, hopes to cash in on digital wallets again.

The problem: what they’re apparently pitching doesn’t offer any real advantage for consumers, according to analysts who are relying on details given exclusively to The Wall Street Journal.

The consortium includes Wells Fargo & Co., Bank of America, JPMorgan Chase, and four other financial services companies, according to the Journal. The digital wallet, which does not yet have a name, is expected to launch in the second half of this year.

The payment system would be managed by Zelle’s parent company, Early Warning Services LLC (EWS). It would have about 150 million Visa and Mastercard credit and debit cards connected at launch, with plans to add other card networks later, according to an EWS blog. An EWS spokesperson offered little insight on the product: “The wallet is intended for e-commerce. We will share more at a later date.”

The digital wallet project is not a first for some in the group; JPMorgan Chase, for example, shuttered Chase Pay in 2021 after only a year in operation because it couldn’t gain merchant adoption, according to analysts.

The current plan for the consortium’s digital wallet will likely involve consumers typing their email on a merchant’s online checkout page, according to the Journal. “The merchant would ping EWS, which would use its back-end connections to banks to identify which of the consumer’s cards can be loaded onto the wallet. Consumers would then choose which card to use or could opt out.”

Dan Poswolsky is a former product manager who helped lead development of Chase Pay 1.0, the former global head of consumer experiences at POS system maker Verifone, and a former a business leader for new product development at Mastercard. He is currently head of US products for digital wallet provider Curve.

Poswolsky believes the big-name bank consortium is missing the mark when it comes to consumers. And, the latest effort will also fall flat if the banks don’t add any technological advantages over current digital wallets. The following are excerpts from a Computerworld interview with Poswolsky:

Dan Poswolsky

Q: In what way are digital wallets a threat to traditional banking? Why do all these banks keep trying to break into that space? Apple Pay allows you to use your credit card, as well as Apple’s credit card. If your credit or debit card is connected, why do banks care who provides the app? “The banks want to own the customer relationship. They do not want to be behind the scenes. If you look at American Express’ financial report last year and look at the executive compensation, and the criteria by which they assess those executives, one of the measures is increasing usage and adoption of the Amex mobile app. Why? Because you want to own that customer relationship. You want the customer to interact with you and not with someone else to get to you.

“The more you have to interact with someone else to get to the bank’s services, the more the bank becomes just a commodity. It’s not like an Intel chip inside; it’s more like you’re the batteries, and they have less ability to upsell customers and build strong relationships. The banks really just become the plumbing of the payment system rather than the owner of the payment system.”

What impact, if any, will this latest attempt at a digital wallet by this banking consortium have on established players, like Apple, Google and PayPal? “Mastercard did the same thing with Masterpass, and where did that go? Visa did the same thing with Visa Direct. Where did that go? Chase Pay, where did that go?

“When I was at JP Morgan, we would always say we could buy our way out of innovation gaps, but we couldn’t survive reputational or compliance issues. So, that mindset still exists. They’ll dabble with this and see what happens, but they’re not going to go all in with it.

“I think this will be seen as a ‘meh’ by other established players. Unless you come up with a magical experience as Apple did with biometric authentication and enable online commerce with mobile banking authentication and not have the user create a new username and password and all that other nonsense, you’re just going to be a carbon copy of other digital wallets.”

You were inv involved in the development of Chase Pay 1.0. What went wrong with it? “I was actually the one who wrote the one-page slide for the investor day first introducing Chase Pay. That was in 2014. In the customer’s mind, the one asset everybody agrees on is banks are all about security. It’s a tragedy single sign-on for the web is now dominated by social media rather than banks. I think banks have the right to actually be the federated ID, so to speak.

“That’s why we launched Chase Pay. You were going to be able to shop online using your Chase.com password and username. The unique thing about Chase versus other banks is Chase has a very big merchant service arm, which at the time was called Chase Paymentech [a payment processing and merchant acquisition business].

“Chase Pay was on a good trajectory. We launched it very fast and ended up getting a half a dozen online merchants in eight months before [it even went live], and then we started getting much larger merchants onboard. But, then what happened is we got into the classic dilemma that all banks go through: You want to develop a solution for all rather than a solution for some. I was no longer with Chase at that point…. I was following it on the sidelines because this was my baby they were destroying.

“…What they did is they said it’s time to expand into the physical point of sale [arena]. So they acquired MCX in order to use their tech to enable them to pay with QR codes at a physical store, such as Walmart. The irony of this is Walmart founded MCX. So, Walmart actually created it under the premise of lowering fees. The aim was to lower the cost of acceptance, while also giving people an amazing user experience. This is before COVID and before smartphone cameras automatically recognized QR codes. You had to download a separate app on your phone called a QR code reader, and then press that and give it permission to access your camera to read QR codes back in that day.

“What happened is Walmart then backed out of it and said ‘We want to create our own thing and call it Walmart Pay,’ because that seems to be the thing to do — take your name and add the word “Pay” to it. If you look now, this all fits into what Walmart is doing today. They’re working on a super app behind a bunch of the Goldman Sachs people and they’re calling it ONE.

“Also, Chase’s experience with in-store commerce made payments at the point-of-sale harder, not easier. Instead of just swiping a card or tapping a phone, I had to open my phone, open this QR code app, expose the QR code, let the merchant scan the QR code, and then confirm the purpose. That may be cool to tech geeks at the time, but it’s not a better user experience. It had more steps and was more kludgy. Then on the online side, because they got so distracted by physical point-of-sale sites, they neglected the online side and stopped trying to go after it.”

What was wrong with Chase Pay focusing on in-store sales? “Whenever they were creating these business models, they’d ask: what’s more important? Should I go after these large merchants with an in-store presence or go after online merchants? Well, we know 90% of purchases were in-store at the time and only 10% were online. So, they wanted to have a solution for all and not just for some. So they focused on an in-store solution, even though in-store doesn’t really have that much of a problem to solve; people are quite easily able to walk up and pay with a credit card.

“I do think they could have gotten more traction on the online side because they did have a captive audience with all the merchants for whom they process online payments, and they have all the consumers through the largest credit card issuer [Chase].”

You alluded to another problem. What was that? “The other problem was the Chase Pay experience, even online, it didn’t solve the “NASCAR effect,” where you’ve got a large number of logos or advertising images when you use the online check-out button.

“Back in 2014, 2015, all these online merchants had a checkout button — a method of payment. If you want to increase conversion, you have to decrease choice. If you give the customer a hundred buttons to pay, all of which indirectly end up linking to debit card or credit card, you’ve now confused your customer and now there’s more [customer] drop off. We called it the NASCAR effect because now you had all those ads everywhere, and that was very distracting. We [Chase] went to merchants and said we want to add one more button, and the merchants said we don’t want to make it more difficult for our customers.

“Chase was trying to tell them we’re making the experience more seamless, and the merchants were saying, ‘not really, because you’re asking people to opt-in to one more payment method during our checkout process.’

“You’re trying to get people to enroll in something while buying something else. During that flow, you’re going to have more and more people drop off. This was before being able to use an Apple Pay button to use a biometric method to pay.”

Can and should banks try to compete with established players like Apple Pay and Google Pay? “Yes. Banks should compete. However, banks should also be more open.

“One of the biggest Shakespearian tragedies that I see is the banks have this intense fear of disintermediation. I had that mindset also when I was there [at Chase]. Because of that, the activities they take to avoid disintermediation actually end up causing it.

“…Look at the digital wallets that are dominant now. You have Apple Pay, Google Pay, and PayPal — all of which each of the banks have announced strategic relationships with in some way to allow a seamless onboarding of the credit and debit cards into that wallet. But, how about all those other guys trying to come up with digital wallet solutions? For example, Curve. What about all the wearable [mobile device] companies out there?

“There are a host of companies out there trying to make it easier to pay with something in their possession — even Amazon. They said, ‘We don’t have a smartphone (even though they tried to), so we can’t do an Apple Pay or Google Pay, so let’s try to use customer’s palm print or a scan or their eye.’ That was Amazon One. It was trying to link their palm print to their card.

Instead, the banks decided [they’re] just going to treat all your digital wallets the same as the different merchants and make sure it’s secure and just allow you to load it away, and let these guys compete. Instead, what these guys do is they’d limit where people can go and load their cards and therefore restrict the way digital wallets could gain scale and you’re left with these dominant players who can boss them around, charge them fees, and make them feel disintermediated.”

“So, the first thing the banks should do is be more open. They’re causing their own disintermediation, which is why I say it’s like a Shakespearian tragedy.”

So, what makes a digital wallet successful? “If you look at the wallets that have been successful, Apple Pay, for example, was not the first to use a contactless chip embedded in a phone to pay. There was a precursor wallet called ISIS that had an unfortunate name that was later changed to Softcard [later acquired by Google]. But the relevance of this is that Softcard was similar to how EWS is a consortium of banks who all own the digigal wallet.

“In 2011, telcos were afraid of the Google Wallet. Google first comes out with Android, and then Google Wallet, and so the telcos were thinking, ‘Oh no. These are our customers. We don’t want to be disintermediated. We want a direct relationship with the consumer.’ Sound familiar? It’s the same thing the banks were saying.

“Verizon, AT&T, and T-Mobile got together and they formed a consortium, and they named it something stupid. But they spent over $100 million — possibly over $200 million — on developing this digital wallet that would allow you to tap your phone [at the POS] and pay. They spent all that money, and they offered a boring, generic experience — nothing magical. What happened? It was a colossal failure.

“In their defense, they didn’t have the technology at the time to make the experience magical. The experience was inferior to the experience of paying with a plastic card. You would have to go into the phone, click on the app, let that load, select your credit card, tap the phone, and then leave. So, a lot of steps. It’s much easier to just take out your card, tap it, and walk away.

“What Apple Pay did, which was brilliant, was they waited. They said, ‘You know what, this experience sucks. Why would we build a digital wallet that can’t deliver something magical, something that’s a better user experience?’

“Then of course Google followed suit. Now, you look at the opportunity for Zelle. That user experience that The Wall Street Journal summarized is like a snooze fest. Nothing special. I can tell you from my experience of working with consortiums, it ends up becoming design by consensus, which ends up with the user experience you end up deploying being the least common denominator.”

So, what would be sexier — more magical — than what’s being offered by the digital wallets of today? “Remember Zelle said they’re focusing on online commerce. There is new technology; it doesn’t have a sexy name like biometric authentication, but it’s called authentication via mobile app or third-party app authentication.

“It’s a method that’s different than trying to verify someone’s identity by logging in and then using two-factor authentication — where the person gets an SMS message and then verifies it on their mobile device. That’s a pretty clumsy experience.

“What we can do now with this third-party authentication [is] you can create a magical experience on a merchant’s website. You click ‘Pay with my mobile banking app,’ and the phone gets an alert saying, ‘Will you confirm you want to pay this amount? Yes or no.’ You’re essentially replicating the same experience you have in a store on the register.

“This technology is commonplace in the UK for different use cases. In the UK, they have this concept of open banking, where you can link your bank account to other banks and share all your data with them. As part of that flow, the customer decided to transfer their Barclay’s data to Lloyd’s. So then, the Barclay’s app opens up the Lloyd’s app and asks if you want to do this and you confirm it and it then goes back to the app.

“So, authentication through third-party apps exists today and in my opinion would make it a magical experience for the user. It would make the experience much more consistent with in-store experiences.”

So, why don’t you think the new bank consortium will do that? “Well, that’s not the description printed in The Wall Street Journal article. And, secondly, it’s because it’s a consortium of banks. They have to solve for the least common denominator. They’re going to obsess over edge cases, such as what if a person has more than one banking app on their phone, which one takes priority? …They’ll obsess over security, which is correct. But the way to solve security issues is what is the attack vector I’m trying to solve for and how to I mitigate that?

“[As an analogy,] does having a door without a bolt lock create a risk. Sure? But, do you really need that door lock if you’re in a building with a doorman and there’s only five tenants?”