Stephen Gandel in New York
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America’s largest banks are preparing to fire the latest salvo in their efforts to defend their turf from Big Tech groups.
JPMorgan Chase, Bank of America, Wells Fargo, and others, next year plan to launch Paze: a mobile wallet that will connect directly to the credit and debit card accounts of 150mn customers. The app will be operated by Early Warning Services, a bank consortium group that already runs payments app Zelle.
Paze is the latest sign that big banks see partnerships — either working collectively or even in collaboration with tech firms — as the best way to stop the advances of the likes of Apple, Google and, most recently, Elon Musk’s X (formerly known as Twitter), which aim to offer banking services to their millions of users.
But, just as banks are seeking more deals with fintechs, those partnerships are coming under greater scrutiny from regulators who worry that such tie-ups could open the banks and the US banking system to bad actors.
“Regulators want banks to know who their customers are, and that becomes a lot harder when you are working through a fintech,” says Michele Alt, a bank consultant and a former top official at the Office of the Comptroller of the Currency. “Anecdotally, we have heard increased examination scrutiny by regulators of these partnerships.”
The rush to partner up is a big shift from just a few years ago, when the megabanks thought they could go up against Big Tech, the start-up fintechs and each other — one-on-one — and win.
A growing number of large banks are more interested in outsourcing to us and other fintechs
In 2017, for instance, JPMorgan paid $400mn for fintech WePay as a launch pad for building out Chase Pay — the bank’s mobile wallet and a competitor to ApplePay and Stripe. Less than four years later, though, unable to convince customers to take the extra step of paying through its app, the bank shuttered Chase Pay.
More recently, JPMorgan has struck deals with Amazon and Apple that will help the two tech companies expand the banking services they are able to offer their customers. Citi also has a deal to provide some of the financing for Amazon’s instalment payment offering.
In the UK, Lloyds Banking Group said this year that it is looking to strike partnerships with fintechs. Meanwhile, the banking division of French mobile company Orange has agreed deals with fintechs Younited and Mambu to power a digital lending and online banking platform, respectively.
A recent survey from industry watcher PYMNTS.com found that 65 per cent of banks and credit unions had formed at least one partnership with a fintech in the past three years.
“We see a lot of banks that want to partner,” says Jakob Pethick, chief commercial officer of London-based fintech YouLend. “It tends to be the midsized European banks for us, but a growing number of large banks are getting more interested in outsourcing their origination to us and other fintechs.”
Now, the mobile wallet is the biggest battleground in the tussle between big banks and Big Tech.
Banks have long dominated the payments portion of financial services, especially when it comes to consumers. But the emerging superpower at the cash register is Apple, with its tap-to-pay app Apple Pay.
The iPhone maker does not release official statistics on use of its mobile wallet, saying only that 90 per cent of US retailers now accept the payment app. According to market researchers, Apple Pay accounts for just 6 per cent of global purchases. But the number of Apple Pay users has climbed rapidly, from 60mn five years ago to more than 500mn now. Industry watchers say this has made banks nervous. “It’s a $40tn experience,” says Michael Abbott, global head of banking at Accenture. “If you sit in front of that experience, you can monetise that experience.”
In March, Apple announced a new buy now, pay later product — Apple Pay Later — which it says it will fund with its own money rather than use bank financing. A month later, it launched a high interest savings account, through a partnership with Goldman Sachs.
Enter Paze, the banks’ soon to be launched digital wallet.
The banks are hoping to replicate their huge success with Zelle, which has quickly become the largest peer-to-peer payment app since its 2017 launch. Payments over Zelle rose nearly 30 per cent last year, to $629bn. That compares with just $244mn last year for Venmo, launched in 2009 and owned by PayPal since 2013.
However, banks have been hit with criticism that they do little to reimburse Zelle customers who have been a victim of fraud, a growing problem on the app. The banks say they are not responsible for any funds lost using the payment tool, which is technically owned by an independent entity.
To make Paze a killer app, banks will have to commit to allowing it to connect directly to customers’ bank accounts, say consultants. That could give Paze an advantage over the likes of Apple Pay, which does not contain any money.
Last month, Early Warning, the group behind the app, announced that it had recruited Cameron Fowler, a top executive of Canadian bank BMO Financial Group, as its next chief executive. Fowler is expected to join the company in October.
But Early Warning has given few details about the functionality of Paze, or whether users will be able to access their account information through the app. Either way, some industry watchers say the banks will struggle to win back customers who have already become accustomed to the ease of Apple Pay.
“The history of the banking industry is replete with advances that become industry standards and Apple Pay is likely to become one of them,” says Alt. “I’m not sure banks can put that genie back in the bottle.”