PayPal gives banks a run for their money

When it comes to digital wallets, traditional banks have been slow to jump into developing products to offer their customers. Now, that lethargy is showing up as a negative in consumer surveys, such as the one recently administered by Carlisle & Gallagher Consulting Group. Nearly half of the respondents were interested in mobile wallets in general, and of those, 80% would rather use eBay's (Nasdaq: EBAY) PayPal than their own bank — if PayPal offered other banking services as well.

So far, banks don't have to worry about having PayPal as a direct competitor. But that day may not be far off. The company has worked long and hard to be at the top of the e-payment heap, and it recently rolled out its new and improved digital wallet. For instance, customers can now create personalised wish lists for which PayPal can hunt down deals and coupons, as well as search and compare products and prices. Users can even change the method of payment during a grace period, which, I imagine, would help prevent overdrafts.

PayPal definitely rules this space, though Google, whose own digital wallet has received a lukewarm reception at best, seems determined to create a version that other carriers beside Sprint Nextel (Nasdaq: S) will actually like enough to use. While its Wallet 2.0 may be an improvement upon its predecessor, Sprint is rumored to be working on its own digital wallet, using near-field technology. If true, this development will take the wind out of Google's sails, unless it finds another carrier for its new system.

If digital wallets are so popular, why don't banks develop their own versions?  Customers want it, yet banks are achingly slow to offer such services — even though, as a recent banking magazine article notes, doing so could eventually reduce the need for expensive branch locations. While most of the top banks have mobile-banking apps, there is a dearth of the type of mobile-wallet perks that consumers want and that PayPal provides.

Fool's take
Some banks are catching on and looking to provide these types of services. Bank of America (NYSE: BAC), also a leader in mobile banking apps for both cell phones and tablets, is developing a chip for customers' mobile phones that would allow them to pay at retailers by touching their phones to a special reader at checkout. JPMorgan Chase (NYSE: JPM) isn't quite as far along as B of A but is currently creating partnerships with companies that provide digital payments. Wells Fargo (NYSE: WFC) has been investing in mobile payment systems for several years, though it has still not settled on a service to offer its customers.

Will they offer any of the special features that PayPal's system does? Certainly they would be wise to do so. It should be at the top of their priority list, in fact, since customers seem so prepared to dump their bank in favour of an alternative servicer if they don't. As more regulations come down the pike limiting how banks can make their money through trading, banks need to cultivate the goodwill of the banking consumer — the group that created the need for banks in the first place.

Banks will eventually get on board the mobile platform, as consumer demand is increasing day by day.

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