Big traditional banks have often been criticized for being late to the party when it comes to integrating customer-friendly technology. That's one reason fintech has been one of the hottest investment areas over the past several years, attracting hundreds of billions of dollars in the name of making online payments easier.
But the big banks are starting to fight back. Early Warnings Services, the entity behind money-transfer service Zelle and backed by a group of large financial institutions, is launching a digital wallet later this year that will allow debit and credit card holders to check out at online merchants without entering their card details.
For a while now, PayPal Holdings (PYPL +1.25%) has been the undisputed leader in digital payments. Is this the beginning of its demise? Let's take a closer look.
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Seven large U.S. banks -- Wells Fargo, Bank of America, JPMorgan Chase, Capital One, PNC, U.S. Bancorp, and Truist -- will help launch the new digital wallet, with 150 million Visa and Mastercard credit and debit cards immediately connected at the start. Users will be able to check out without manually entering their information, which is meant to be both easier and more secure. Plus, they probably won't have to sign up for an entirely new service or mobile app, keeping their sensitive information with one entity. At the same time, merchants can benefit from better checkout conversion.
While the details are still being worked out, this offering is no doubt a potential threat to the leader in digital payments: PayPal, which had a whopping 397 million individual active accounts and processed an incredible $337 billion in total payment volume in the third quarter of 2022. What's more, PayPal is the most popular digital wallet, with 76% of the top 1,500 online merchants in North America and Europe accepting it at checkout (according to a study roughly a year ago by Digital Commerce 360).
But PayPal has been a disruptor for more than 20 years, and its dominance in the space today can be attributed to its growing network effects. As a two-sided platform, PayPal's service becomes more valuable to its users as it gets bigger. Merchants are attracted to the massive group of buyers, and these buyers are also attracted to the huge number of places to shop. It's a positive feedback loop that continues feeding on itself and getting stronger as it expands. Customers also get access to cash back incentives and various rewards opportunities, which is hard to beat.
These powerful characteristics, bolstered by PayPal's undeniable head start, give me enough of a reason to not be too worried about the new digital wallet that's being introduced by the big banks. Sure, they might have some quick early adoption from their existing cardholders, but they'd still lag far behind PayPal, whose users transacted on average 50.1 times in the trailing 12-month period.
This begs the question of why Early Warning Services didn't launch this a decade ago. Having seven different organizations involved, all with their own agendas, can certainly slow down the development process. Maybe they reached a point where they just couldn't sit on the sidelines and do nothing while a fintech commanded a rising share of the payments industry.
By now, consumers have developed habits around using digital wallets, as opposed to services offered by big banks. The latter group's user experience would definitely have to be far superior to what's already out there. I think it'll be difficult to change this behavior.
As a result, PayPal and its shareholders don't have anything to worry about at this point. But any progress made by this new product launch should be watched closely.
