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The Ratings Game: The big banks want to take on PayPal in e-commerce, but that’s harder than it seems

PayPal Holdings Inc. helped make it easy for consumers to store their payment information for online purchases. Now the banks want in on that game.

The Wall Street Journal reported Monday that a handful of big banks including Wells Fargo & Co.
WFC,
+2.71%
,
Bank of America Corp.
BAC,
+1.61%
,
and JPMorgan Chase & Co.
JPM,
+1.73%

were working together on a mobile wallet that could be used for online shopping. The wallet, which will be managed by Early Warning Services, will allow consumers to link their debit cards and credit cards for use in e-commerce.

Early Warning Services is owned by the big banks and already runs the Zelle peer-to-peer payment platform, which competes with PayPal
PYPL,
+0.24%

in the market for money transfers between friends, family members and others. A mobile wallet, which could debut in the second half of the year, would pit the bank-owned group against PayPal—and Apple Inc.
AAPL,
+2.79%

—in a different way, as the banks try to assert more control over the online-shopping experience.

Read: Why Zelle moves twice as much money as Venmo

“The large banks likely always had PayPal envy & regretted not acting sooner/more effectively to control online payments,” Bernstein analyst Harshita Rawat wrote in a note to clients.

While the banks somewhat mitigated the PayPal threat by partnering with the digital-payments company, Rawat expects that they’re now especially worried about Apple. The consumer-electronics giant is seeing growing traction for its Apple Pay service that lets people use their cards to pay online and in-store.

“Apple charges banks a fee for Apple Pay, and can throw more weight around if Apple Pay’s use continues to grow,” Rawat continued. The smartphone giant also has signaled further ambition in the world of financial technology through a buy-now-pay-later program.

Read: Why Apple’s BNPL efforts could mark a ‘tipping point’ in lending

PayPal’s stock shrugged off the threat of bank-fueled competition, with its stock up 0.7% in midday trading Monday. Rawat saw merely “headline risk” for PayPal at this point.

“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,” she wrote, noting that Apple Pay only has an estimated low- to mid-single-digit share of online payments in the U.S. after more than eight years of operation.

She noteed that merchants typically have to put in a lot of legwork to get new payment types set up for use “so unless banks are ready to offer substantial discounts (which negatively impact their card businesses) and perhaps liability shifts, it is unlikely that merchants will warm up to the offering soon.”

The Wall Street Journal highlighted that, while the banks could ultimately look to enable payments straight from bank accounts, banks plan to first launch the wallet with debit and credit cards from Visa Inc.
V,
-0.11%

and Mastercard Inc.
MA,
+0.56%
.

That the card networks feature into the banks’ initial plans highlights how Visa and Mastercard have entrenched themselves in the payments ecosystem and fended off disruption through their decades of operation.

“A big reason that the banks’ wallet roads have led back to V/MA is around challenges in creating a dispute & chargeback system,” Rawat noted. “Banks are the biggest beneficiaries of the networks’ interchange-led card payments systems. Any efforts to disintermediate that, threatens one of the most profitable products within banks’ portfolio — cards.”

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