U.S. banks develop digital wallet to compete with Apple Pay, PayPal

A recent report has revealed that several large U.S. banks — including JPMorgan Chase, Wells Fargo and Bank of America — are developing a joint digital wallet that will connect to debit and credit cards to compete with Apple Pay and PayPal.

The Wall Street Journal first reported that Early Warning Services, which also runs the digital payments network Zelle, would operate the new wallet, with Visa and Mastercard on board with the new project. Early Warning Services later told CNBC that it would launch the wallet this year.

Analysts said the new move showed the traditional banks' effort to slow down the growth of tech companies in the financial industry. Apple already offers its customers a branded credit card and is developing other financial products.

Meanwhile, PayPal's shares gained 0.5 percent on Monday's trading session despite falling more than two percent in the initial period.

AB Bernstein senior analyst Harshita Rawat said these large banks had "likely always had PayPal envy." She, however, said that the new wallet would require more time to compete with these established digital wallets.

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"It simply takes a very long time, a killer customer experience (which needs to be better than incumbents, not just similar), and a compelling merchant value proposition to build the two-sided network effects in payments to achieve scale."

Harshita Rawat, Senior Analyst at AB Bernstein

The report about the plan followed mixed earnings reports from big banks. Several of their leaders, including Bank of America CEO Brian Moynihan, warned about the possibility of a mild recession for the U.S. this year.

BofA beat its top and bottom line projections for Q4 of 2022. However, it set aside a $1.1 billion provision for credit losses to prepare for a possible recessionary environment ahead. Moynihan said credit delinquencies had risen from the low pandemic levels.

Throughout 2022, bank stocks struggled in a volatile market due to the Federal Reserve's monetary tightening policy. Slower investment in banking and recession fears offset gains in the sector.

Urgency to develop digital wallet

IT consulting firm Accenture has said next-generation payment methods are gaining more users in the U.S. and other parts of the world. Data showed that 20 percent of global consumers use a new payment system for e-commerce, while nine percent use it for in-person transactions.

By 2025, Accenture predicted that 18 percent of global consumers would use next-generation payment methods in live transactions.

Accenture's survey revealed that debit and credit cards remained the most used payment methods in the U.S. However, 46 percent of the survey respondents said they were actively using digital wallets.

The fast-paced growth, according to Accenture, comes at the expense of traditional payment methods. Accenture projected that the shift in payment preferences could cost U.S. banks $31.4 billion in revenue from 2023 to 2026.

The firm advised that banks rethink their strategies and take opportunities from their competitive advantage, namely consumers' trust in their stability and security.

"For banks, credit cards are clearly a high-value proposition and most organizations make a significant amount of money through their cards," Sulabh Agarwal, global payments lead at Accenture, said.

"When card volumes go away into other payment types, that's when that value starts to get challenged."

According to Accenture's survey, more than half of credit card users are thinking of changing their method of payment to avoid interest charges. The study also found that 17 percent of participants use cash to make purchases to avoid interest.

Agarwal said the Buy Now Pay Later (BNPL) sector would be a promising venture for big banks. Furthermore, banks' participation in the BNPL market can push authorities to take care of its regulation more seriously.