Bank of America (NYSE:BAC) is clearly not in the mood to just stand by and watch as technology firms like Google (NASDAQ:GOOG), Square, PayPal and LevelUp eat into the market share of banks and credit card companies in the payments market with mobile payment offerings. Vying for a slice of the action, the country’s second largest bank in terms of assets launched its Mobile Pay on Demand service last week. 
The mobile payment system allows the use of any smartphone or iPad as a point-of-sale terminal and is aimed at small businesses. With transaction fees set at levels similar to those currently charged by technology firms, Bank of America is no doubt looking to gain a strong footing in the payments market with this new offering. But does the bank really have its clients on board with this plan?
We maintain a $9.80 price estimate for Bank of America’s stock, which is at a premium of less than 10% to the current market price.
Technology Firms Have The Upper Hand At The Moment
Mobile-based payments solutions were ushered in by some of the largest technology firms over the decade, and since then these firms have had a strong grip on the industry. This has been a source of pain for credit card payment companies as well as banks as the credit card business represents a sizable part of their business models and the mobile payment systems were often advertised as significantly cheaper alternatives to the card payment systems. Banks have historically charged small businesses at least 3% of the transaction size as a per-swipe charge, besides additional monthly or annual fees. In comparison, mobile payment systems like those offered by PayPal cost the merchants between 2.7%-2.75% of the transaction amount per swipe with no monthly/annual fees. 
The lower charges by technology firms have put pressure on the banks’ card payment charges in recent years – a situation aggravated by slowing economic conditions. And the banks have also lost a large number of small business customers to technology firms. This was despite the attempts by major banks like Wells Fargo (NYSE:WFC) and U.S. Bancorp (NYSE:USB) to popularize their own mobile payment services. Much of this has to do with the fact that customers prefer alternate providers over their banks when it comes to mobile payments – something captured in recent market surveys (see Banks’ Mobile Payment Services Not Catching On).
But The Banks Aren’t Giving Up Yet
Bank of America has tried its best to make Mobile Pay on Demand attractive to small businesses, starting with a revamped fee structure in-line with existing mobile phone payment service options. While the bank is making the mobile app and the secure card available to interested merchants for free, it also provides them with added benefits of speed by linking the payment system with its savings/checking accounts. Additionally, the merchants also gain access to the bank’s marketing platform to offer promotions and deals to Bank of America customers.
What remains to be seen is how effective this new product offering is in attracting small businesses in the short run, and eventually in raising card revenues over the years to come.Notes:
- Bank of America Merchant Services Announces Mobile Pay on Demand Solution for Small Businesses, Bank of America Press Releases, Nov 13 2012 [↩]
- Bank of America set to enter mobile payment space, The Washington Post, Nov 14 2012 [↩]