Alternative payment strategies have been around for as long as there has been bartering for goods and services, but today’s financial institutions have to worry about competing with a whole new generation of online payment systems. For example, Google and Facebook are beefing up their online payment strategies, joining the ranks of PayPal, iTunes, and start-ups like Square and Stripe.
Facebook recently announced that it is close to obtaining a license from Ireland’s financial regulator to accept payments on the social media site. Apparently Facebook is also looking to partner with three London technology start-ups specializing in mobile money and online transfers. Since Facebook already has a rich advertising delivery platform, the ability to add instant online transactions could turn Facebook into a shopper’s paradise. And it could be a banker’s nightmare since those transactions would bypass the normal bank transaction channels.
Google also introduced its own plastic debit card tied to Google Wallet, the company’s smartphone payment app. Now Google Wallet users can use their debit card instead of their smartphone to pay for transactions, which means they can use their Google Wallet account instead of their bank account to pay for purchases anywhere a debit card is accepted. Google Wallet also offers users a single location to store loyalty programs as well as 24/7 fraud detection, making it more attractive to use than bank cards for many consumers.
The challenge to banks, of course, is that the popularity of these emerging financial applications is detracting from the use of fee-based banking services. Medill Reports quotes an analyst at the Aite Group:
“When consumers have so many alternative options with technology companies, those banking relationships become less sticky,” said Nathalie Reinelt, analyst with Aite Group, LLC. “Additionally, banks could face a loss in revenue via transaction fees, depending on the technology products consumers adopt.”
Reinelt also notes that Facebook and Google make much more revenue from their advertising business than they are likely to make from online transactions. However, the data acquired through their transaction services about consumer buying habits will prove invaluable.
Still, these types of technology-driven financial services continue to pose a challenge to banks, especially since they are unregulated.
Some banks are stepping forward with their own mobile apps and streamlined transaction systems, but regulations and other factors, most banks limit mobile apps to doing business with the bank, supporting mobile deposits, bank transfers, and account management. Most purchasing transactions are still made through debit and credit cards. What technology companies like Google and Facebook bring to the party is frictionless transactions – no entering credit card numbers of authentication information to make a secure online purchase. And it’s hard to compete with the “cool” factor.
So how big an impact are the technology upstarts going to have on the banking industry? They will probably be subject to government oversight at some point but will they steal market share before they are regulated? Or will pressure from tech startups and established tech giants force financial institutions to change the way they do business? What are your thoughts?