Global Payments 2018: Reimagining the Customer Experience

Global Payments 2018 REIMAGINING THE CUSTOMER EXPERIENCE The Boston Consulting Group (BCG) is a global management consulting firm and the world’s leading advisor on business strategy. We partner with clients from the private, public, and not-for- profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with more than 90 offices in 50 countries. For more information, please visit bcg.com.

SWIFT is a global member-owned cooperative and the world’s leading provider of secure financial messaging services. We provide our community with a platform for messaging and standards for communicating, and we offer products and services to facilitate access and integration, identification, analysis and regulatory compliance. Our messaging platform, products and services connect more than 11,000 banking and securities organizations, market infrastructures and corporate customers in more than 200 countries and territories. While SWIFT does not hold funds or manage accounts on behalf of customers, we enable our global community of users to communicate securely, exchanging standardized financial messages in a reliable way, thereby supporting global and local financial flows, as well as trade and commerce all around the world. As their trusted provider, we relentlessly pursue operational excellence, support our community in addressing cyber threats, and continually seek ways to lower costs, reduce risks and eliminate operational inefficiencies. Headquartered in Belgium, SWIFT’s international governance and oversight reinforces the neutral, global character of its cooperative structure. SWIFT’s global office network ensures an active presence in all the major financial centers. For more information, visit www.swift.com or follow us on Twitter: @swiftcommunity and LinkedIn: SWIFT. GLOBAL PAYMENTS 2018

REIMAGINING THE CUSTOMER EXPERIENCE

MOHAMMED BADI

STEFAN DAB

ALEXANDER DRUMMOND

SUSHIL MALHOTRA

FEDERICO MUXI

MAARTEN PEETERS

PRATEEK ROONGTA

MICHAEL STRAUß

YANN SÉNANT

October 2018 | The Boston Consulting Group CONTENTS

3 INTRODUCTION

6 MARKET OUTLOOK Global Trends Regional Outlook

14 RETAIL PROVIDERS MUST EVOLVE THE PAYMENTS JOURNEY Five Ways to Improve the Online Buying Experience Three Ways Acquirers Can Improve the Broader Merchant Experience

20 WHOLESALE BANKS MUST ADDRESS THE EXPECTATIONS GAP Unresolved Pain Points Erode Banks’ Trust Advantage Wholesale Banks Can Close the Gap in Three Ways Create a Roadmap for Change

26 IT’S TIME TO ACT

27 FOR FURTHER READING

28 NOTE TO THE READER

2 | GLOBAL PAYMENTS 2018 INTRODUCTION

ayments remains one of the brightest spots in the financial Pservices universe. Propelled by positive macroeconomic tailwinds, continuing technological advances, and expanding digital and non- cash mechanisms, payments businesses globally are on track to add $1 trillion in new revenue through 2027. That outlook presents enormous opportunities for retail and wholesale payments institu- tions. Capitalizing on those opportunities, however, requires that banks and payments providers address lingering customer pain points.

The quality of the payments experience matters not only because of the strong projected growth across the transactions space but also be- cause payments has an outsize influence on the banking relationship overall. Payments interactions are the most frequent point of custom- er engagement, giving banks, card issuers, and acquirers significant opportunity to shape customer perceptions, capture valuable data, and build loyalty. The relationships formed through those repeated in- teractions allow institutions to deepen their customer understanding, foster customer trust, and improve cross-selling and service, all of which significantly influence the overall shopping experience.

As a result, payments companies have begun to play a more active role across the buying journey, going beyond their traditional narrow role in enabling acceptance to forging customer-centric shopping in- teractions that reduce cart abandonment rates, create omnichannel customer experiences, and make credit easier for customers to access.

These factors, combined with favorable economics, mean that the payments space will be increasingly contested over the next decade. This will lead to a number of fundamental disruptions, including the following:

•• Leading retail banks will continue to reimagine the customer experience in payments. They will do so by resolving remaining pain points and further personalizing the customer experience. As a result, digitally savvy first-mover banks will take share from slower-moving competitors.

•• Online payments providers will expand into offline acquiring. A structural shift is occurring in shopping, from in-store commerce to e-commerce driven by digital marketplaces and online mer- chants. With pockets flush from the expected surge in e-commerce purchasing, providers of online solutions will take share from incumbents that have been slow to address customer pain points.

The Boston Consulting Group • Swift | 3 We also expect increasing concentration within the online acquir- ing space, as large acquirers with the capability to serve the dominant, internationally active online retailers take share from smaller ones. The growing dominance of Amazon-like market- places and Netflix-like digital content providers will accelerate this trend.

•• Consolidation across the broader payments space will acceler- ate. Consolidation is picking up speed in the fragmented European acquiring and processing market. This trend will spread to the US, further condensing an already concentrated space, as providers look for ways to address deteriorating margins and fund new digital capabilities.

•• Rapidly developing economies (RDEs) will remain a hotbed of innovation. We expect that many of the most disruptive payments business models will come from players in Asia and Latin America that target underserved populations and segments. Examples include GrabPay, Paytm, Ant Financial, and Tenpay.

•• Card payments will continue to prosper despite threats. While card payments will continue to benefit from cash conversion tailwinds, the shift to real-time payments combined with the second Payments Services Directive (PSD2) in Europe and the United Payments Interface (UPI) in India have made account- based payments players more competitive. Rapidly growing merchant wallets such as Amazon Pay and MercadoPago and emerging peer-to-peer (P2P) schemes could raise the stakes further if they enter the account-based payments space. Card issuers and networks could counter that threat by promoting contactless payments and embracing initiatives that make authentication easier.

•• The US market will become an increasingly attractive target for attackers. Large Chinese players, many of which are keen to expand abroad, are especially likely to target the US for its large revenue pools.

•• New digital categories will be on the rise. Although e-retail is still the largest vertical in online commerce with 40% to 60% of spending, new digital categories are emerging. These include subscription services for digital content, a category that is ex- pected to account for approximately 10% to 20% of the global e-commerce market. Other emerging categories include real-time, contextual commerce in social platforms (such as booking a restaurant from within Airbnb or by “searching nearby” on Google Maps) and expanded direct-to-consumer (D2C) offerings for products such as mattresses (Casper) or food (Blue Apron) that were once considered too large or experience-driven to buy without sampling.

Incumbents are in a vulnerable position because many have been slow to address long-standing customer pain points. To hold onto valu- able customer relationships and take advantage of the strong growth

4 | GLOBAL PAYMENTS 2018 potential in payments, banks and providers must focus their strategy and resources on the following:

•• Improve the consumer payments experience. Providers focused on the retail market must make both e-commerce and the physical point of sale (POS) friction-free. That requires redesigning the online buying journey, innovating smarter authentication stan- dards, and promoting contactless payments to facilitate smoother and faster interactions.

•• Provide merchants with integrated and omnichannel pay- ments. Merchants are looking to transaction providers for plug- and-play capabilities that make it easier to incorporate payments systems and functionality within their own operations. This requires merchant acquirers to invest in creating a better buying experience and update their go-to-market models.

•• Rethink the wholesale business model to address treasurer needs. Corporate treasurers face an expanding remit that has exposed gaps in many wholesale-banking service portfolios. To maintain treasurer trust, wholesale banks must define a clear digital strategy and upgrade their service approach to optimize human and virtual coverage on the basis of customer value and needs.

•• Commit to making needed operational changes. Established players need to mature their data and analytics capabilities, embrace open-banking innovations, improve monetization oppor- tunities, and provide more-tailored services and offerings. They must also forge greater connectivity internally and use data-driven insights to increase sales effectiveness.

These factors are likely to play out in different ways for retail and wholesale payments providers. BCG’s Global Payments 2018 report ex- amines the challenges and opportunities they will create over the next ten years. We look at the state of the market, both globally and in different geographic regions, and explore the pain points that pro- viders must address to turn payments into a long-term avenue for growth.

The Boston Consulting Group • Swift | 5 MARKET OUTLOOK

ayments revenue has been growing at such as interchange rate changes in certain Pa CAGR of 6.8% globally since 2010, countries. reaching $1.27 trillion in 2017. Projections for the next ten years look equally rosy. We predict payments will generate more than Global Trends $1 trillion in new revenue over the next While the payments outlook can vary across decade, growing to $2.42 trillion by 2027. segments and providers, BCG data reveals (See Exhibit 1.) several overarching patterns that could have strategic implications for participants in the That translates to a CAGR of 6.6%, outpacing global payments arena. global nominal GDP growth. The ongoing shift to noncash payments is driving that Noncash Use Is on the Rise growth and creating a windfall for payments Some countries are rapidly becoming cash- providers, despite mounting pricing pressure less, a trend fueled by contactless payments

Exhibit 1 | Payments Revenue Is Expected to Grow by $1.1 Trillion Through 2027

Payments revenue ($billions) REVENUE GROWTH (CAGR) 2,500 2,419 2010–2017 2018–2027 +6.6% 2,000 1,778 1,465 (61%) $370 billion $751 billion 1,500 +6.8% 1,362 1,273 1,027 (12.6%) (8.3%) (58%) 1,000 657 714 –40% 805 (52%) (52%) 286 (36%) 500 953 $98 billion $305 billion 616 648 752 (39%) 518 (42%) (2.5%) (4.4%) (64%) (48%) (48%) 0 2010 2017 2018 2022 2027 +80% Rapidly developing Mature markets CAGR economies Source: BCG Global Payments Model 2018.

6 | GLOBAL PAYMENTS 2018 and the expanding availability of digital pay- is led by a concentrated group of leading ment methods. The Nordic countries, espe- banks. (See the sidebar “The Russian Mira- cially Sweden and Norway, are a prime ex- cle.”) Our data show that the use of noncash ample. There, the average number of card methods by these tigers has begun to rival— transactions is substantially higher than that and even exceed—that of some mature mar- in mature markets in general. kets. (See Exhibit 2.)

As comfort with noncash methods grows glob- “Payments tigers” have ally, we expect that consumers will increasingly use electronic means to pay for smaller trans- made rapid progress toward actions, where coins and cash used to domi- nate. By 2027, we expect average non-cash- becoming cashless. transaction values for retail customers to fall to about $54, compared with $97 in 2017.

While these and other mature markets rank RDEs Will Grow at Twice the Rate of among the heaviest users of noncash pay- Mature Markets ments, RDEs are catching up. An emerging More than 70% of global revenue growth group of “payments tigers” has made espe- over the next ten years will come from cially rapid progress toward becoming cash- RDEs—26% of it from China alone. Strong less. Poland has its Cashless Poland collabora- macroeconomic performance, increasing tion between government and key payments cash-to-noncash conversion, and high interest players, while the move to cashless in Russia rates will combine to support average annual

THE RUSSIAN MIRACLE

In Russia, non-cash-payment transactions ers also helped support adoption, increas- per capita grew from approximately 25 in ing the number of point-of-sale (POS) 2010 to roughly 150 in 2017, a 29% CAGR. terminals fourfold over 2010. In 2010, Russia ranked 29th in Europe in card transactions per capita. By 2017, it Customers liked the convenience and ease had jumped to 14th place, ahead of of noncash transactions. They also enjoyed Western European markets such as Spain innovations such as the instant and and Germany. commission-free mobile-to-mobile pay- ments that Sberbank offered. To boost Several factors led to the transformation. consumer confidence, Russian card issuers The first was that banks had some natural made a strong push to safeguard against incentives. Russian banks were in need of fraud. Almost 100% of cards are chip-pin cheap retail funding after the financial and conform to the security protocols crisis, and noncash transactions provide a advanced by major card networks; all stable source of fee income. The Russian payroll cards have free SMS notifications banking market is also highly concentrated, for each transaction. As a result of these so the actions of a few banks often set the changes, Russia has now become the bar for the rest. Card issuers such as global leader in the number of tokenized, Sberbank, with its 55% market share based contactless secured transactions and the on payments transaction value, employed largest market for digital wallets. 10,000 meet-and-greeters in bank branches to provide information and encourage adoption. In addition, they invested heavily in technology to improve the quality and availability of contactless payments, digital wallets, and mobile P2P payments. Acquir-

The Boston Consulting Group • Swift | 7 Exhibit 2 | Eastern Europe Has Seen Rapid Growth in Card Transactions Per Capita

IN 2010, MANY EASTERN EUROPEAN COUNTRIES WERE …BUT BY 2017, THESE EASTERN EUROPEAN LEADERS HAD PRIMARILY CASH-BASED SOCIETIES… LARGELY CLOSED THE CASHLESS GAP WITH WESTERN EUROPE

Card transactions per capita, 2010 Card transactions per capita, 2017 500 500 Converging to Cash loyalists Approaching Converging to cashless Cash loyalists Approaching cashless cashless cashless 400 400

300 300 Western Europe 200 200 200 Western Europe Eastern 115 Europe 100 100 80

30 0 I H M P S S Gr eec e R S F r a n C z ec h G e No r w E s U K R P S C y C r oa t U k I F i B A D e L N e L L T B S L P A E s I F r a n U K B S S S C y G e M T H P C z ec h R Gr eec e R U k B No r w S F i D e L C r oa t L I 0 N e S r e Eastern t r e t u a t i l l w p w u o r tu g al o l u a l el g i u u u a t i o m u w l p w l u un g a r y o r tu g al o l u thu a n n a l el g i u u o v e o v u o m un g a r y a l thu a n n o v e o v t a l p x e a i r k t l s r m l r a i n e n p x e e i ss i th e a i r k l s o n r m l l r a i n e v n i e a n ss i th e y a n g a r i t o n l v a n y a n t g a r i a n Europe r u t t t d a n r u a k m i z e t n d r i a a k m i c e z e a n m a a n r i a c e a m a a n e ay n a i a n y e i e ay n y d a d i s a n y e i a y d R r l d a r k s a d m a R i r l r l n a r k a d m i b r l i n i a b a i a a n a i i a n a a n o u i a a n a e o u a e p p d d d r g u d r g u s s bl i bl i c c

The names of the ten fastest -growing countries, on the basis of Western Europe Eastern Europe card transactions per capita, are shown in green.

Source: BCG Global Payments Model 2018. Note: “Approaching cashless” is defined as greater than 250 card transactions per capita; “converging to cashless” is defined as greater than 100 card transactions per capita. Card transactions per capita include retail transactions only.

growth of 8% in payments revenue through Absent a sudden spike in interest rates, pri- 2027. Although payments revenue is lower in mary revenue will account for 54% of total mature markets than in RDEs, it is expected payments revenue growth over the next ten to grow at a healthy CAGR of about 4% over years as rising transaction volumes fuel the next ten years. Mature markets will ac- growth in interchange revenue flows. The ex- count for approximately 39% of global pay- ception will be in Western Europe, where ments revenue by 2027. As such, these mar- caps on interchange suggest that the balance kets will remain crucial for global payments of primary- and secondary-revenue sources players. will remain relatively unchanged over the next decade despite the rapid growth in non-cash-transaction volumes. Mature markets will see strong It’s a different story in RDEs, where primary growth and remain vital areas sources contribute only 24% of total pay- ments revenue. We expect that the primary- for global payments providers. payments revenue share will grow to 27% in the years ahead, however, as consumers in RDEs increasingly embrace fee-generating The Mix Between Primary- and Second- noncash payments. Nevertheless, secondary ary-Payments Revenue Is Shifting revenue will remain the primary growth driv- Primary revenue comprises the fees that er, accounting for 73% of total revenue growth are collected each time a payment is pro- in RDEs. (See Exhibit 3.) cessed, and secondary revenue includes non-transaction-related card revenue as well RDEs Continue to Drive Payments as account revenue. The role that each plays innovation in driving total payments revenue growth is Scrappy, young digital payments players— shifting. Buoyed by non-cash-payment vol- propelled by strong investor backing—are umes as well as a significant decline in inter- creating bold, new business models and tar- est margins, primary-payments revenue now geting populations that traditional payments accounts for 43% of total payments reve- providers have largely ignored. BCG’s Fintech nue in the mature markets, up from 38% in Control Tower data reveals that large fintechs 2010. in the Asia-Pacific region account for almost

8 | GLOBAL PAYMENTS 2018 Exhibit 3 | Primary Sources Are Driving a Greater Share of Payments Revenue Growth

MATURE MARKETS RAPIDLY DEVELOPING ECONOMIES

Payments revenue ($billions) Payments revenue ($billions) 1,500 1,500 1,465 27%

1,000 953 1,000

616 47% 657 518 24% 500 43% 500 73% 38% 286 53% 22% 76% 57% 62% 78% 0 0 2010 2017 2027 2010 2017 2027

Primary Secondary

Source: BCG Global Payments Model 2018. Note: Primary revenue includes revenue from transactions only; secondary revenue includes annual account maintenance fees, interest on account deposits, card fees, and penalty fee revenue. Mature markets include Western Europe, North America, and Asia—mature (Australia, Japan, New Zealand, and South Korea); all other regions are included under rapidly developing economies. half of total equity funding in digital retail POS solutions tailored to the needs of online payments. retailers and small merchants.

We predict that RDEs will continue to be Incumbents have missed a hotbed of payments innovation—raising the bar for incumbents both locally and out on the massive growth globally. captured by attackers. Regional Outlook Factors propelling growth play out differently While incumbents have not lost in absolute across countries and regions. Here is our re- terms, they have missed out on the massive gional payments outlook. growth that attackers have been able to cap- ture by providing customers with compel- US ling new features and services. In China, for Helped by favorable macroeconomic condi- instance, companies such as Tencent and tions, US payments revenue grew at a 5% Ant Financial have created a huge mobile- CAGR from 2015 through 2017. Card pay- payments ecosystem that caters to the needs ments revenue grew 6% during the same peri- of people not sufficiently covered by tradi- od. We project that growth will slow slightly tional banks. Paytm has done the same in from 2018 through 2027, hovering at about India, focusing on small merchants that fre- 4% for payments overall and 5% for card pay- quently go underserved by traditional banks. ments. The shift to digital payments has been Paytm’s innovations, including user-friendly particularly robust, with mobile commerce QR codes that make it easy for shop owners becoming an increasingly important compo- to enable acceptance along with Paytm’s nent of this growth. As an example, mobile huge on-the-ground sales teams, have won purchases accounted for one-third of 2017 the company a wide following. Likewise, in Thanksgiving Day, Black Friday, and Cyber Latin America, new players such as PagSeguro Monday online payments. and Stone have disrupted business previously dominated by big bank-owned acquirers by Still, while US consumers have shown a will- offering innovative e-commerce and mobile ingness to buy online through apps, they

The Boston Consulting Group • Swift | 9 have been less inclined to use apps when Europe making in-store purchases. Mobile wallets In Europe, total payments revenue grew at a and device apps accounted for only about 2% CAGR from 2010 through 2017 to reach 1% of all in-store purchases during the $216 billion. Declining interest rates contrib- Thanksgiving Day period. Another worry is uted to flat growth in payments revenue in that growth in online sales and “card not Western Europe; this weighed down pay- present” transactions could lead to an uptick ments revenue growth across Europe as a in remote fraud, which can be easier to exe- whole. That should change going forward, cute and scale than in-person fraudulent- and we expect payments revenue to maintain card use. a CAGR of 6% through 2027, as transaction growth in both Western and Eastern Europe accelerates. Fintechs and digital giants A number of factors are likely to reshape the are raising the bar for payments space across the region over the next several years. The first is consolidation. traditional payments players. Several M&A deal announcements in the first half of 2018 herald a new wave of buyouts in the European merchant-acquiring landscape. In addition, fintechs and digital giants are This builds on an earlier wave of private eq- raising the bar for traditional payments uity (PE) acquisitions that were focused on players. For example, the in-store credit snapping up undermanaged utilities. Those space is rapidly innovating. Fintechs such as acquisitions helped PE owners generate tre- Affirm, GreenSky, and Vyze are providing a mendous value—professionalizing manage- credible alternative to traditional store ment and allowing them to gain new digital cards, offering merchants simple integra- capabilities and serve as a platform for fur- tions and providing customers with even ther acquisitions. We also see the emergence more ways to pay. of pan-European payments providers, such as Worldline and Nets, that are seeking to use Others are experimenting with different earlier investments to build cross-border pricing models and bundles. Fair Square, a scale over the next several years. This will fintech specializing in near-prime lending, make it harder for subscale and bank-owned achieved a 30% better response rate in a ma- assets to compete, which will spur further di- jor marketing campaign as a result of ad- vestments, partnerships, and consolidation. vanced machine-learning techniques that sped test-and-learn cycles. Similar tech- Another factor is regulation. The European niques also improved underwriting perfor- Commission launched a proposal to reduce mance. the price of cross-border euro payments in non-euro EU member states and increase While fintechs and digital giants still com- transparency for customers when doing cur- mand only about a 2% share of the overall rency conversions. This will likely lead to low- payments market in the US, card issuers can’t er cross-border payments fees. Competition afford to sit back. Many are using cobranded will also intensify. As PSD2 opens up the opportunities to expand their base and devel- banking market, the payments arena will be- op attractive customer value propositions. come increasingly crowded, with more play- That push has led to shifts in some cobranded ers and a greater number of product choices ventures, as well as major changes to program for customers. economics and more-aggressive rewards. Rather than view the disruption as a threat, Finally, as real-time payments come to the however, leading banks will take advantage US, banks will be pressed to upgrade their of the opportunities that open banking cre- technology stack and find use cases that al- ates to augment existing services, build new low them to gain a competitive edge over digital channels, and create disruptive new peer banks and nonbank competitors. ventures of their own. In addition, banks can

10 | GLOBAL PAYMENTS 2018 use their trusted advisor status to become a South Korea, in particular, has become a valued custodian and steward of customer world leader in cashless transactions, helped data—something that will become increas- by a regulatory environment that has favored ingly important in light of the General Data the growth of strong local card companies. In Protection Regulation (GDPR) that mandates 2017, South Korea had approximately 436 stricter data governance rules. noncash payments per capita, almost double the number in 2012. Finally, the payments infrastructure is chang- ing. In November 2018, the European Central Technology is one of the key drivers behind Bank (ECB) will launch its TARGET Instant this growth in noncash payments in Asia; it is Payment Settlement Service (TIPS) in an ef- being used to simplify the customer onboard- fort to create a pan-European solution for the ing and transaction experiences. For example, settlement of instant payments, alongside facial recognition and fingerprints are replac- other initiatives such as EBA Clearing’s RT1 ing passwords and know-your-customer (KYC) system, which was launched in 2017. We ex- authentication for financial transactions. pect that 80% of European banks will be in a position to accept pan-EU real-time credit Another trend is the speed at which non- transfers by the end of 2018. banks are entering the payments arena. They include a growing number of social media Asia companies (for example, Line, Facebook, and In Asia, total payments revenue grew at a KakaoTalk) as well as startups in sectors 12% CAGR from 2010 through 2017 to reach seemingly far removed from financial ser- approximately $490 billion. And we expect vices. Grab, for instance, is a major Southeast that it will continue to grow, increasing at a Asian transportation company with a rapidly CAGR of 7% through 2027. While consider- growing payments and financial services ably above the 4% annual growth rate in ma- portfolio for small merchants and entrepre- ture markets, the rate of growth in Asia is neurs. The company’s digital payments ser- slowing. That’s largely because of China, vice, GrabPay, now boasts a user base of 6 which drove more than half of the 12.6% million entrepreneurs with a target to in- growth rate in RDEs since 2010. crease that number to 100 million by 2020. Use of GrabPay credits has grown 80% month to month since its launch in November 2016. After stellar growth over the In China, digital giants such as Ant Financial past seven years, China’s and Tencent dominate the fast-growing mo- bile-payments space. They have a combined payments space is maturing. market share of over 90% in mobile pay- ments. Given the fierce competition between these two players in domestic markets, both As payments in China mature and transition are also looking to expand abroad. In doing to alternative payments schemes, revenue so, they are taking a two-pronged strategy: growth from traditional financial institutions trying to replicate their original model across has begun to slow, particularly in debit cards. Asia-Pacific through investments in local digi- After the stellar growth of the past seven tal wallets (for example, Alipay’s investments years, the country’s payments space is matur- in Paytm in India) and seeking to expand ac- ing. Annual card transactions per capita in ceptance at retailers in Europe and North China will reach more than 200 by 2027, America by targeting Chinese tourists and the which corresponds to the average number of Chinese diaspora. Together, these businesses annual card transactions in mature econo- have attracted a staggering $18.5 billion in mies in 2017. As payments growth in China equity funding—roughly 45% of total equity cools, large economies such as India, Indone- funding in digital retail payments globally. sia, and Vietnam will pick up some of that slack. Each is on track to increase payments The sharp growth trajectory of Chinese digi- by more than 9% over the coming decade. tal payments services Alipay and Tenpay over

The Boston Consulting Group • Swift | 11 the past several years matches a slower in- further as the UPI was extended in 2018 with crease in debit card spending in the country, new features such as linking overdraft ac- after staggering growth of 38% CAGR from counts, sending invoices directly to a custom- 2010 through 2015. er’s inbox, and scheduling payments.

In addition, the UPI’s open architecture has The UPI could be a game encouraged tech giants such as Google and Facebook as well as local e-commerce players changer for the digital like Flipkart to build intuitive payment apps, which could boost adoption of noncash pay- payments space in India. ments for P2P as well as merchant trans- actions.

Elsewhere in the region, India has seen pay- Latin America ments volumes rise significantly in the two Payments in Latin America continue to show years since demonetization. In 2017, total strong growth, rising by a CAGR of 9% from payments revenue equaled $20 billion, com- 2010 through 2017, and are expected to in- pared with $17 billion in 2016. We expect crease by a further 11% annually over the that payments revenue will increase at an next ten years. We see significant room for 11% CAGR over the next ten years. One factor growth in Latin America because non-cash- behind this growth has been the availability payments penetration significantly lags that of innovative payment methods such as Pay- in mature economies. While the macro- tm and Google Pay (formerly Google Tez), economic picture for Latin America is mixed, which have expanded payments access. An- noncash payments are gaining traction. other factor has been the Indian govern- MercadoPago, the payments branch of the ment’s push to advance noncash payments, marketplace giant MercadoLibre, now offers an effort that included promoting payments mobile wallets, P2P, mobile POS, and mer- infrastructure modernization and waiving the chant financing. Argentina’s Todo Pago is fol- merchant service charges (MSCs) for debit lowing a similar path with P2P and QR-based transactions below $30 through a subsidiza- mobile payments. In Chile, Banco Bci has tion program. added an innovative P2P platform and launched a prepaid card called MACH. Winners from demonetization include the lo- cal card scheme RuPay, whose volumes are The acquiring landscape is transforming rap- up almost 2,000% over the past two years, idly and opening up to new competitors. In driven by increased activation and use of Brazil, the historical stronghold of Cielo and debit cards, and the digital wallet Paytm, Rede is under attack by Santander Getnet whose volumes grew by 900% over the same and new entrants such as PagSeguro and time period. Both succeeded in attracting un- Stone. Incumbents and large banks are com- derbanked or inactive customer segments. peting on several fronts, including the sale of POS terminals. In Argentina, regulators have On the infrastructure side, the UPI that the been pushing for the sale of bank-owned Pris- National Payments Corporation of India ma, while in Colombia regulators are trying (NPCI) launched in 2016 could be a game to expand competition beyond the country’s changer for the digital payments space in In- two payments processors/networks. In Chile, dia and may lead to a drastic shift away from new player Multicaja received an acquiring traditional cards and wallets to account-based license and is challenging the traditional in- payments. The UPI has also made it easier cumbent, Transbank. And Compraqui, a new for foreign attackers such as PayU and acquiring service offered by BancoEstado and WhatsApp to enter the Indian market. SumUp, is making inroads against established institutions by focusing on long-tail opportu- In the two years since UPI launched, UPI vol- nities such as underserved small merchants. umes have grown to 9% of total retail pay- In Mexico, Citibanamex sold its acquiring di- ments in India; and they are set to increase vision to EVO Payments.

12 | GLOBAL PAYMENTS 2018 Across Latin America, new regulations are cryptocurrencies. In addition, the government also having an impact. Brazil and Argentina and financial sectors are working together on both introduced new interchange regulations. initiatives to improve noncash adoption, such And Brazil’s central bank announced a plan as enabling the use of QR codes. While these to develop a national instant-payments interventions create new challenges for pay- scheme. In Mexico, regulators are working to ments players, they are also likely to drive the mandate open banking and provide a regula- growth of noncash payments. tory framework for other innovations such as

The Boston Consulting Group • Swift | 13 RETAIL PROVIDERS MUST EVOLVE THE PAYMENTS JOURNEY

etail banks, merchant acquirers, jarring. As digital giants and fintechs vie for Rand payments providers have the oppor- their share of the payments space, card tunity to increase revenue significantly over issuers must address key irritants in the the coming years. Our data shows that retail purchasing process to retain existing custom- revenue is on track to outpace wholesale ers and expand their base. payments revenue. (See Exhibit 4.) Maintain- ing strong growth, however, requires that retail payments providers address crucial Five Ways to Improve the Online customer pain points. In a “click of a button” Buying Experience world, buying journeys that are riddled with We recommend that payments providers manual processes and clicks feel especially focus most of their attention on the online

Exhibit 4 | Retail Payments Revenue Is Expected to Outpace Wholesale Payments Revenue

RETAIL PAYMENTS WHOLESALE PAYMENTS

+7% Payments revenue ($billions) Payments revenue ($billions) +6% 119 41 1,850 5% 600 25 568 263 153 14 13% 11% 1,500 462 5%

30% 400 69 965 307 1,000 59% 6% 11% 13% 5% 31% 200 500 51% 60%

50% 25% 24% 0 0 2017 Credit card Account Debit card Non-card- 2027 2017 Credit card Account Debit card Non-card- 2027 revenue revenue revenue transaction revenue revenue revenue transaction revenue revenue CAGR 7% 7% 7% 5% CAGR 7% 6% 7% 6% CAGR 2017–2027

Sources: BCG Global Payments Model 2018; BCG analysis. Note: Credit and debit card revenue include transaction-specific fees (interchange fees, merchant-acquiring fees, and currency conversion fees for cross-border transactions) and monthly or annual card membership fees. Credit card revenue also includes net interest income, penalty fees, and other service fees (for example, cash withdrawal fees). Debit card revenue also includes fees for overdrafts and insufficient funds. Account revenue consists of net interest income and maintenance fees on current accounts (such as demand deposit accounts). Non-card-transaction revenue includes transaction-specific fees and, as applicable, fees for overdrafts and insufficient funds. Credit card revenue includes charge cards; prepaid cards are included in non-card-transaction revenue. Totals and percentages may reflect rounding.

14 | GLOBAL PAYMENTS 2018 shopping experience. Not only is this the It’s an annoyance that is likely to get worse as fastest-growing area in the consumer pay- PSD2 regulations take effect in Europe. Those ments space, it’s also the one where the pain regulations are expected to double the num- points are most pronounced. ber of transactions that require strong cus- tomer authentication. To avoid losing share E-commerce transactions account for close to to competitors such as PayPal and Amazon 12% of total retail sales. That percentage is like- Pay that have created one-click checkout ly to increase to 20% by 2022 as the number of solutions, card issuers and card networks digital channels and buying platforms prolifer- must come together and significantly revamp ates. We estimate that more than 20% of the the authentication experience. growth in acquiring revenue will be driven by demand from global merchants and those that One promising approach is to advance the are considering expanding internationally and use of biometrics. Given the widespread need global payments solutions. Yet incumbent adoption of mobile phones, fingerprint and players will face stiff competition. facial recognition methods could speed checkout without compromising security. An- other way to reduce cart abandonment rates Time and tedium are a is to develop risk-based algorithms as an al- ternative to PSD2’s strong customer authenti- major driver of high cart cation requirements. abandonment rates. Over the longer term, providers should push for an industrywide authentication standard. Authentication solutions that are limited to a To attract and retain customers, providers single use case or a single bank won’t be must address persistent problems. Data able to build critical mass; customers won’t shows that the average e-commerce website be interested in juggling multiple authentica- requires shoppers to click roughly 23 times tion protocols. Instead, banks should take before completing their purchase.1 Cumber- their cue from the Nordic countries, where some checkout processes often require cus- industrywide authentication has been tomers to complete a series of microtasks, around for some time. One initiative that such as keying in their billing address, credit could be particularly promising is the Secure card number, shipping address, and other ba- Remote Commerce (SRC) standard being im- sic information. The time and tedium are a plemented by Visa and Mastercard, which major driver of high cart abandonment rates, could result in a single “buy” button across especially in mobile commerce, where cus- card networks, merchants, and channels. (See tomers are on the move and might not have the sidebar “A Card Network Initiative Could the time or all the information required to Help Unify Authentication Standards.”) finalize the payment. In the first quarter of 2018 alone, cart abandonment resulted in an Inject New Value into the Buying estimated $236 billion in lost sales.2 Journey Payments providers have several ways to dif- Banks and payments service providers must ferentiate their service and add customer val- address these issues or risk losing their share ue. One is to remove unnecessary process of the sizable revenue growth that is forecast steps by redesigning and automating the in the space. Rather than spreading their bud- e-commerce experience. For example, mer- gets across a number of initiatives, retail pay- chants that offer Apple Pay, which automates ments providers should focus on several cru- the entire purchasing journey, have sales con- cial issues. version rates that are five times higher than those that don’t use Apple Pay. Another way Simplify and Harmonize payments providers can differentiate their ser- Authentication vices is by offering personalized recommenda- One major driver of online cart abandon- tions and improving site selection—and their ment is a clunky authentication experience. extensive transaction data repositories give

The Boston Consulting Group • Swift | 15 A CARD NETWORK INITIATIVE COULD HELP UNIFY AUTHENTICATION STANDARDS

EMVCo, an organization established and ing experience offered by Amazon and managed by six major card networks, PayPal. announced the creation of Secure Remote Commerce (SRC), a set of digital authenti- If the effort proves successful, adoption cation standards designed to work across could also reduce complexity and costs for all card schemes and issuers. merchants, many of whom today must integrate a wide assortment of checkout The aim is to create a simpler and more and authentication options. Customers will secure checkout process for web and register for the authentication program mobile shopping. In addition to establish- using their online banking app, and card ing uniform authentication standards, the issuers will enable SRC within their own SRC initiative includes digital process online apps. In addition, SRC is designed to enhancements. When the SRC system work within EMVCo’s wider portfolio of goes live—expected at the end of 2018— security technology, including EMV Pay- customers will be able to press a single ment Tokenization, which should make it “buy” button during online or mobile easier for merchants to store card tokens checkout, similar to the one-click purchas- securely.

them a distinct advantage in this area. A third able purchasing bigger-ticket items online. way to inject value is to offer innovative pay- This will fuel demand for online financing. In ment options through features such as instant response, we expect the consumer finance financing and flexible payback terms and to business to move online as well. Fintechs improve the postpurchase period through such such as Klarna and Affirm and large card is- things as real-time chargebacks—all of which suers such as Synchrony already have their are likely to have wide customer appeal. eyes on this opportunity. But rather than cede this area to them, incumbent issuers should Reinforce Leadership in Card-on-File partner with acquirers or merchants and cap- Payments ture this emerging opportunity in online At the physical POS, consumers decide which credit. card they wish to use each time they make a transaction. The online space is different. Develop Payments Solutions That There, the ability to preselect a card on file Work Globally means one card tends to become the default. While e-commerce is becoming increasingly The largest card issuers understand these dy- global, consumers often still want to pay namics. Many have begun to partner actively using their familiar, local payment methods. with large merchants in offering incentives With the rapid growth that’s occurring in and promotions to make their card the prima- cross-border e-commerce, online merchants ry card-on-file choice. Smaller issuers are at a are looking for providers that can help them disadvantage in this area because many do accept a variety of local payments solutions not have digital teams to promote card activa- by supporting alternative payment methods tion and partnerships with retailers. With dig- and making authentication easier for card ital payments likely to account for up to 50% payments. Leaders in this area have the of payments revenue growth, the battle for potential to generate significant new reve- primary-card status in digital payments is one nue flows. To avoid being left behind, other that issuers cannot afford to lose. payments providers need to focus on the merchant segments where they have the Embrace the Move to Online Financing strongest market opportunities and need to As e-commerce becomes more mature, cus- invest in digital cross-border payments tomers are becoming increasingly comfort- solutions.

16 | GLOBAL PAYMENTS 2018 Three Ways Acquirers Can airlines, for instance, that have integrated Improve the Broader Merchant payment and booking systems can spare cus- Experience tomers the hassle of reentering or supplying Although merchant acquirers have invested their credit card number to buy extras for a in improving service and outreach, most hav- flight or check out of a hotel. en’t made the deep, structural adjustments needed to address lingering pain points. The need for these capabilities has opened That’s giving fintechs and new digital en- the door to integrated software vendors trants an unnecessary advantage. (ISVs) that provide payments integration and vertical industry specialization. ISVs now ac- Payments providers focusing on mobile POS count for 5% to 10% of total card transaction solutions for small retailers or online pay- volume in the US, and their share of the mar- ments solutions for e-commerce players are ket is expected to grow significantly over the using their digital capabilities to provide mer- coming decade, especially among small to chants with enhanced offerings that are de- midsize enterprises. Verticals with a relatively signed to slot easily into a merchant’s exist- large penetration of integrated payments ing systems. They are increasingly providing today include online marketplaces, quick- the capabilities that allow merchants to deliv- service restaurants, personal services, health er an omnichannel customer experience care, and B2B. As this market grows, we ex- without being limited by geographic bound- pect vertical specialization will expand to in- aries. clude many other sectors.

The combination of innovative tactics, the growth in M&A, and the arrival of e-wallet Successful ISV partnerships providers—some of which are bypassing tra- ditional acquirers and bundling merchants require a heavy investment in directly into their proprietary wallets—is causing price compression in the industry. In service and technology. the US, for instance, we predict these factors will lead to a roughly 3% decrease in acquirer margins. As ISVs gain scale and expand along the val- ue chain, acquirers need to defend their base. We are also witnessing an evolution in how While some may choose to invest in building digital mobile POS companies and e-com- their own integrated payments capabilities, merce players go to market. New players are others will focus on forming strategic partner- finding innovative ways to expand their mer- ships with ISVs or acquiring ISVs outright. chant base, using a multichannel distribution These arrangements would allow merchant model that includes direct online sales as acquirers to gain access to needed functional- well as sales through partnerships. This ap- ity and provide customers with a comprehen- proach allows new players to rapidly scale up sive payments offering. sales across geographic areas and extend ser- vice to small and midsize enterprises. Forging successful ISV partnerships requires a heavy investment in service and technology. To meet the changing needs of merchants In the technology industry, leaders such as and grow in the face of pricing headwinds, Microsoft succeed in wooing desirable ISV merchant acquirers need to address three partners by demonstrating that they have crucial areas. leading technologies and by making it easy for an ISV developer to quickly and cost- Deliver Integrated Payments effectively integrate its products into their Merchants increasingly want payments func- systems. This practice of demonstrating a tionality to be integrated into their core sys- company’s “partner of choice” credentials is tems, such as their ERP and accounting sys- on its way to the acquirer space, where tech- tems, and they want that functionality to be nical capability and customer centricity are tailored to their particular industry. Hotels or becoming paramount.

The Boston Consulting Group • Swift | 17 To attract the most promising ISV partners, greater productivity and growth. In merchant acquirers must upgrade their core high-performing B2B sales teams, for technology stack to support collaboration instance, the inside sales force drives as and develop APIs to simplify data connec- much as 70% of all sales, according to tions. They also should create mechanisms BCG data. to evaluate verticals and partners systemati- cally in order to ensure that the arrange- •• Align sales coverage with customer ment satisfies return on investment. Finally, value. To improve sales effectiveness and acquirers need to develop a competitively customer service, leading players segment advantaged, customized offering for their their coverage models. They match their target verticals so that they can reduce the top-performing relationship managers pressure to share a larger portion of their with high-value accounts or those that revenue with ISVs. have the most complex needs; they migrate lower-value customers or those with basic needs to an online sales model Acquirers must develop a backed by top-notch digital processes that allow customers to manage most needs competitive, customized using convenient, self-service tools. Merchant acquirers can adopt a similar offering for target verticals. approach. In addition, they should integrate the postsales team into the coverage model to improve communica- Adopt a New Go-to-Market Approach tion and collaboration across the sales While the ISV channel will expand signifi- cycle and identify cross-selling opportuni- cantly in the US and beyond, direct sales ties. These steps can help acquirers channels will remain important. For exam- increase customer satisfaction, retention, ple, large merchants will continue to demand and renewals. direct acquirer relationships. While digital technology companies such as Salesforce. •• Shift from inbound to outbound leads. com, Box, and Amazon Web Services have Feeding the inside and outside sales evolved their B2B sales and marketing mod- teams with potential customers requires els considerably over the past decade, most an investment in next-generation data- merchant acquirers have not. That means driven lead generation. Marketing plays a they’re leaving value on the table. By emulat- much larger role now in B2B sales, and ing the practices of fast-growing technology leading marketing teams use data to vendors, merchant acquirers can improve identify excellent lead candidates and both sales effectiveness and service quality. spot opportunities to help merchants Here’s how: more successfully implement merchant acquirer services. •• Develop an inside sales force. Tradition- ally, merchant acquirers have relied on •• Introduce flexible pricing models.In field representatives to manage all aspects contrast to traditional merchant acquirer of the sales cycle. But that approach can pricing models, which tend to be fixed and result in too much time spent on adminis- tiered with complex structures and trative tasks and too little time in front of layered fees, the new pricing models customers and prospects. Leading players developed by digital leaders emphasize relieve that load by creating an inside simplicity, flexibility, and transparency. sales force to partner with field sales. Merchant acquirers can take a similar While field reps focus on building high- approach and offer a mix of pricing value relationships, the inside sales team bundles and payment plans, such as focuses on sourcing and qualifying leads, pay-as-you-go or subscription services that using lead-scoring algorithms to vet and feature “no hidden charges” guarantees, prioritize promising targets. That im- no monthly minimums, and flat merchant proved division of labor contributes to service charge (MSC) rates.

18 | GLOBAL PAYMENTS 2018 Invest in Adjacent Services acceptance. In particular, we estimate that Acquirers enjoy a strong and trusted position two-thirds of card-not-present payments in in a merchant’s supplier stack. The strongest the US are related to nonretail transactions acquirers leverage that trusted position, as such as bill payments. As competition for well as the extensive data and expertise they merchant business intensifies, innovative have in the payments space, to offer a suite of acquirers will develop capabilities that focus valuable services to their customer base. on these untapped areas to expand their cus- tomer base. The mobile payments company and mer- chant services aggregator Square earns al- most 30% of its adjusted revenue from adjacent services. In addition to same-day deposits, Square’s offerings include the abili- Notes ty to provide loans, invoice services, and pay- 1. Checkout Conversion Index, Payments.com, April 2018 https://www.pymnts.com/checkout-conversion- roll for small and midsize businesses. Square index/ has adopted a VC-style approach to launching 2. Checkout Conversion Index, Payments.com, April these new businesses, with the goal of driving 2018 https://www.pymnts.com/checkout-conversion- both revenue and customer loyalty. index/

We believe acquirers also have a significant opportunity to develop services that go be- yond traditional e-commerce transaction

The Boston Consulting Group • Swift | 19 WHOLESALE BANKS MUST ADDRESS THE EXPECTATIONS GAP

orporate treasurers are being Faced with a more challenging remit, corpo- Cpulled in two directions. On one hand, rate treasurers are looking for their whole- they must manage core cash flow and sale-banking partners to improve the quality liquidity operations with greater speed and and convenience of their service. They want efficiency. On the other, they must address a digital tools and data that make it easier to growing number of strategic business issues manage financial flows, resolve reconcilia- at the enterprise level. Wholesale banks have tion problems, and issue proactive alerts, not kept up with these evolving demands. and they want plug-and-play connectivity Not only have they been slow to innovate between their transaction service provider their product and service offerings, but they offerings and their own internal financial have been slow to address basic shortcomings systems. in the customer experience. Those gaps have opened the door to nonbanks. While ERP providers, treasury management systems It’s essential to treasurers (TMSs), and fintechs lack the institutional expertise and full-service capabilities of that wholesale banks deliver wholesale banks, they are taking share in a number of areas. Wholesale banks must close well on the basics. the expectations gap or find themselves sidelined. But while treasurers are clamoring for stron- ger digital solutions, what they want most is Unresolved Pain Points Erode for banks to deliver well on the basics. A sur- Banks’ Trust Advantage vey at one large European bank found that Many treasurers view wholesale banks as a more than a quarter of all customers said valued extension of their own business, re- managing international and domestic pay- garding them with the same level of trust as ments with the bank was difficult to very dif- they do many internal corporate functions. ficult. Real-time payments will resolve some Yet a BCG treasurer survey in partnership of these issues, but compelling end-user ap- with BNP Paribas found fissures emerging. plications remain a few years out. (See the Wholesale banks are failing to meet customer sidebar “Enabling Faster B2B Payments.”) expectations on a number of fronts. (See Cor- porate Treasury Insights 2018: A Game of Trust, Persistent complaints include long lead times, BCG and BNP Paribas Focus, June 2018.) too many process steps and interactions, and

20 | GLOBAL PAYMENTS 2018 ENABLING FASTER B2B PAYMENTS

Real-time payment (RTP) systems are for control processes, liquidity manage- becoming increasingly well established ment, and accounting protocols). RTPs will across the globe: more than 25 countries also need to be integrated with ERPs, and have RTPs in place, with some notable industrywide collaboration may be required systems including the New Payments to embrace ISO20022. In addition, inertia Platform in Australia and The Clearing could delay adoption—organizations may House’s Real-Time Payments network in be reluctant to invest in change because the US, coming online in the past year. many have passable workarounds for current pain points. While these new systems are still in their infancy, they offer significant potential for That shouldn’t stop banks from taking B2B payments. Faster speeds, payment advantage of RTPs, however. In the short certainty, and payment finality will enable term, banks should focus on using RTPs to just-in-time deliveries and time-critical offer new and innovative services that can disbursements and will expedite the shift improve their corporate customers’ client away from paper in payment-on-delivery experience, differentiate their offerings, and situations. RTPs can also provide organiza- reduce paper. These opportunities are likely tions with richer contextual data. Newer to emerge in the business-to-customer RTPs are set up to transmit more-detailed domain (insurance claim payouts, for remittance information than legacy example), where customers value faster payments systems, adhere to international access to funds; and in new customer- (ISO20022) message standards, and make centric services, such as RTP payments that it possible to attach PDF files with invoices can be made at the push of a button directly or other payment information to the from a payments app. First movers will likely payment message, which can enable a enjoy a short window of opportunity before more seamless, straight-through-processing these services become mainstream. experience in accounts receivable. To foster long-term adoption, banks can There are challenges to overcome, however, take part in industry initiatives to encour- before RTPs become mainstream in B2B. age standardization. They can also partner Organizations will need to adjust current with fintechs to develop industrywide processes (for example, move from batch solutions such as proprietary AP/AR processing to real time, with implications platforms that connect buyers and sellers. too little clarity on timing, approvals, and oth- With banks struggling to meet treasurer expec- er items. Treasurers continue to be frustrated tations, nonbanks are working hard to position by what they see as a lack of transparency on themselves as alternative providers. BCG’s trea- pricing structures, which brings uncertainty sury survey found that treasurers in North and occasionally annoyance. In addition, or- America rated ERP vendors and payments pro- ganizations are not served in a holistic way viders higher than wholesale banks on a trust because of product and structural silos within index. Fueled by massive investments, the the banks, and treasury teams are often number of fintechs specializing in B2B pay- asked to provide documents multiple times ments has grown by more than 33% since 2010, when opening new accounts because of in- according to BCG’s Fintech Control Tower data. consistent banking requirements across re- That growth has led to a rich variety of pay- gions. Likewise, wholesale-banking models ments solutions, including procure-to-pay, ac- are generally not optimized for specific indus- counts payable (AP) and accounts receivable try or business characteristics, which means (AR) automation, cross-border payments, and customers don’t get the tailored advice or ser- specialized working-capital offerings such as vice they would like. dynamic discounting and supply chain finance.

The Boston Consulting Group • Swift | 21 Wholesale banks cannot afford to ignore sure on wholesale banks to create a more sat- these issues. They must take stock of the isfying digital experience will only increase. changing digital landscape and define a clear strategy and approach. We see four emerging digital models that wholesale banks can follow—either individu- ally or in combination—to address customer Wholesale Banks Can Close the needs and avoid disintermediation. (See Ex- Gap in Three Ways hibit 5.) We believe three areas can play an outsize role in helping wholesale banks address the Transform the online-banking platform into expectations gap and provide significant cli- an open-aggregator platform. While bank ent value. They include building out a strong platforms provide rich functionality, treasur- digital channel presence, rethinking service ers don’t want to be wedded to one solution. delivery, and making smarter use of data and Transforming a bank’s proprietary platform analytics. into an open-banking aggregator platform could help banks retain control of the valu- Embrace a Clear Digital Strategy able client interface while giving clients an Wholesale banks should rethink their digital extended 360-degree view of their positions channel strategy so that it fits better with across multiple banks. In doing so, banks evolving treasurer needs. Better aggregation should allow clients to access information capabilities, for instance, would allow treasur- across banks; provide greater transaction ers to track transaction activity across banks functionality; enable easy ERP integration; without having to access multiple systems. and offer liquidity forecasting, working- Likewise, designing services that integrate capital optimization advice, and other data- easily with corporate ERP and accounting enabled add-ons. systems would allow treasurers to avoid time-consuming process steps and improve Launch an independent-aggregator venture. their productivity. As PSD2 and other regula- Wholesale banks could also choose to devel- tions open up the banking market, the pres- op a nonproprietary market-leading platform

Exhibit 5 | Four Emerging Digital Models for Wholesale Banks

TRANSFORM INTO AN OPEN- LAUNCH AN INDEPENDENT- PURSUE INTEGRATION ORCHESTRATE BUYER- AGGREGATOR PLATFORM AGGREGATOR VENTURE EXCELLENCE SELLER INTERACTIONS

The Create a new Extend product and Extend product and service Own the access point to primary distribution channel service offerings to offerings to current clients corporate clients for own benefit leveraging the bank’s for the bank’s current clients and clients from other banks and third-party solutions banks product competencies

Key risks Preference of corporations Potential synergy loss Loss of control of Difficulty for bank-neutral platforms and cannibalization client interface achieving scale

• Client acquisition • Client acquisition • API channel • Client and supplier • Interface design • Interface design management acquisition Critical • Partnership • Interface design capabilities • Integrations • Integrations • Partnership • Partnership development • Integrations development development

Source: BCG analysis.

22 | GLOBAL PAYMENTS 2018 that features the same type of multibank investment and cross-sell other products (in- aggregation and third-party ecosystem cluding giving third parties the option to sell offerings catalogued in the above option but on the platform, with banks taking a percent- run it as an independent initiative. That age of the sale). The marketplace model structure might appeal to treasurers who are would also give banks ongoing access to fresh wary of monobank solutions, especially data that they could use to improve credit because BCG’s survey data shows treasurers scoring and liquidity forecasting as well as for increasingly want bank-neutral offerings. other purposes. Therefore, such a move could be in a bank’s enlightened self-interest. The orchestrator model lets Pursue integration excellence. Rather than try to control the client interface, banks could banks directly monetize their instead elect to integrate their offerings into third-party systems and compete on product platform investment. and service quality. This option could allow banks to face what is already a growing reality, given that only approximately 12% of To succeed with this model, wholesale banks corporate treasurers currently rely solely on need scale. Focusing on a specific industry proprietary banking platforms. Success vertical and collaborating with other banks to requires that banks enable key products and gain critical mass in specific geographic mar- services with APIs that can be reused across kets are two ways to build scale in the short channels in a cost-effective and scalable way. term. This model can be difficult for banks to One leading bank, for instance, created a advance on their own because the skills and dedicated API channel with its own P&L to reach required often go beyond the capabili- commercialize its banking products and ties and networks of traditional banks. services through third parties. Banks could also engineer solutions that make it easy for Determine the right model. These four clients to integrate bank offerings into the options are not mutually exclusive. In choos- most commonly used accounting or ERP ing the type of engagement model to pursue, systems. In addition, they could look to banks should consider their client base, their commercialize payment functionality for the market, their starting position, and their emerging B2B fintech players that don’t have scale. Banks that service a substantial num- a direct connection to the payments infra- ber of large caps, for instance, may want to structure. focus on integration opportunities because large organizations tend to be heavy users of Orchestrate buyer-seller interactions. This TMS. Mid caps, on the other hand, generally approach would allow banks to defend the lack the scale to implement top-end software customer interface in two ways: by offering solutions and may be more interested in attractive payments solutions and by creating aggregation solutions with sophisticated a convenient bank-managed buyer-seller working-capital functionality. Small caps ecosystem. usually are satisfied with a bank portal and have less need for aggregation. Under this model, buyers and suppliers could upload their invoices, integrate payments, With respect to geography, banks in mature and access working-capital solutions. Invoice markets such as the US, for instance, face reconciliation would become significantly greater urgency to digitize their models than easier because both buyer and supplier banks in Asia-Pacific. would be on the same platform. And given that the invoice would also be on the plat- Finally, a bank’s size and market position form and confirmed by the buyer, the model matter. Large banks can afford to invest in would make it easier to offer working-capital several options, while smaller, domestic solutions. This orchestrator model would al- banks need to be more selective. Likewise, low banks to directly monetize their platform incumbent banks have scale but must cater

The Boston Consulting Group • Swift | 23 to a broad set of needs, while attackers all-digital solution tailored to the needs of its have more limited reach but can be more small-business clients. focused. The changes meant revamping a number of Get Strategic with Service Delivery back-end processes, but the bank lowered Wholesale banks must also improve service costs while sharply improving customer satis- delivery. While longer-term structural chang- faction. Although small businesses with more es are important, banks can take several steps basic service needs might be the heaviest us- immediately. We recommend that they start ers of self-service functionality, large organi- by applying value-based segmentation. (This zations would also value the ability to man- is already used in wholesale banks for cover- age routine needs independently. Simple age models and in determining a relationship enhancements such as tools that can upload manager’s client load.) Widely used in other KYC documents and then automatically vali- industries, this model would allow banks to date them against a third-party database align their service with the importance, size, don’t require change-the-bank budgets and complexity, and preferences of different cus- can deliver an outsize return on investment tomer segments—providing corporate clients in terms of customer convenience and cost with a superior customer experience while efficiency. lowering the cost to serve. At the same time, banks should also plan for Under this approach, banks would tailor the deeper changes to their IT architecture. The mix of hands-on and virtual service that trea- goal should be to structurally revise their IT surers receive. They’d provide high-value cus- systems to reach full automation and move tomers and those that have more complex to a zero-interaction, straight-through- wholesale-banking needs with a greater share processing model. This longer-term solution of one-on-one human-guided interaction would enable banks to create the digital while enabling those with routine service backbone needed to offer robust, digitally needs to conduct a greater share of their enabled personalization, proactive advice, banking activities using automated self- and end-to-end automation. “Smart” auto- service. Advances in technology mean that mation would also help treasurers address many customer issues and requests can now mundane annoyances, such as the handling be handled electronically using digital solu- of stopped payments, which would reduce tions such as tracking tools for issue identifi- errors and complexity. cation, self-service modules to address simple problems, and chatbots—with generalist rela- Enrich the Customer Experience with tionship support teams providing backup by Data-Driven Insights phone or email. Banks sit on troves of valuable transaction data. While many banks already leverage this data for enhanced credit scoring or identifica- To improve results, banks tion of cross-selling opportunities, they can also use the data to improve service and ad- need to tailor the mix of vice. Cash flow forecasting tools, working- capital efficiency analytics, peer group bench- hands-on and virtual service. marks, and payments analytics are among the areas that would, according to BCG sur- vey data, be especially attractive to treasur- Early adopters have seen positive results. One ers. Superior data management and connec- European bank recently rolled out a platinum- tivity would also allow banks to improve service offering that assigned the bank’s best service quality, giving relationship managers cash management customers its most senior the ability to examine their corporate clients’ sales people and provided priority service for complete transaction histories and provide such things as cash pool implementations or tailored recommendations. That could help extended hours for issue resolution or ques- banks increase client satisfaction and reve- tions. In parallel, the bank also launched an nue growth.

24 | GLOBAL PAYMENTS 2018 Create a Roadmap for Change banks should consider expanding their Many of the recommendations described in use of robotics; these tools can reduce this chapter will take time to implement, es- labor requirements and serve as an pecially given the sizable agenda that whole- effective transitional solution as banks sale banks are already managing. But banks plan a deeper, more comprehensive IT can do three things immediately: transformation and future-proof solutions powered by artificial intelligence as well •• Fix the basics. Many customer journeys as data and analytics. offer quick-win opportunities for banks to address chronic customer frustrations. •• Partner with third parties. Wholesale These include improving business partner banks should also look at forming selec- management, KYC processes, and technical- tive partnerships with fintechs. The right client onboarding within the account- collaborations would allow banks to opening process. The customer service, access needed capabilities faster and more incident resolution, and cross-border cost-effectively than building them in- payments journeys also contain a number house. With more than 10,000 fintechs to of process issues that basic automation choose from, banks will need to develop and account data integration could formal evaluation criteria, taking into address. Taken together, these improve- consideration such factors as reliability, ments have the potential to deliver ease of integration, monetization, and substantial benefits in terms of customer customer value. This will require a strong satisfaction and efficiency. governance structure to ensure that banks select partnerships that offer clear added •• Fund the transformation. Wholesale value to customers and that they manage banks need to free up investment re- those partnerships effectively. Outsourcing sources to enable open banking, support can be another option, one that may be advanced data and analytics, adopt especially helpful to small and midsize real-time payments, and develop other banks as a way of gaining scale in needed innovations. Combining and reducing the areas. number of daily banking portals that banks maintain, decommissioning legacy By focusing on these three near-term actions, channels, and eliminating redundant or banks can make significant performance lower-value systems can generate import- gains and lay the groundwork for their larger ant run-the-bank savings without requir- transformation journeys. ing a deep IT restructuring. In addition,

The Boston Consulting Group • Swift | 25 IT’S TIME TO ACT

n the retail and wholesale payments To stay relevant, banks must respond faster Ibusiness, customers are becoming impa- and more strategically to the altered pay- tient with clumsy interactions and inefficien- ments environment by focusing on the pain cies. Consumers, treasurers, and merchants points that matter most. With the growing are looking for automated, integrated buying appetite for payments services expected to journeys and tailored service. They have generate $1 trillion in new revenue over the made it clear that convenient, personalized coming decade, banks and payments provid- service both online and offline is essential for ers have an extraordinary opportunity to ex- doing business. And they are increasingly pand their business. Success will rest on how willing to take their business elsewhere, using willing and committed they are to making digital wallets, fintechs, ERPs, and other the needed business and operating-model services and providers if those needs are not changes. met adequately.

26 | GLOBAL PAYMENTS 2018 FOR FURTHER READING

The Boston Consulting Group has Banking’s Cybersecurity Blind How Pricing Can Solve European published other reports and articles Spot—and How to Fix It Banking’s Earnings Crisis that may be of interest to senior A Focus by The Boston Consulting An article by The Boston Consulting financial executives. Recent Group, August 2018 Group, February 2018 examples include those listed here. Global Asset Management 2018: How Banks Can Thrive as Digital The Digital Metamorphosis Payments Grow A report by The Boston Consulting An article by The Boston Consulting Group, July 2018 Group, December 2017

Global Wealth 2018: Seizing the The Power of Digital in Analytics Advantage Commercial Banking A report by The Boston Consulting An article by The Boston Consulting Group, June 2018 Group, December 2017

Global Capital Markets 2018: Why Aren’t Banks Getting More Embracing the Digital Migration from Digital? A report by The Boston Consulting A Focus by The Boston Consulting Group, May 2018 Group, December 2017

Global Retail Banking 2018: Global Payments 2017: The Power of Personalization Deepening the Customer A report by The Boston Consulting Relationship Group, May 2018 A report by The Boston Consulting Group, October 2017 Global Corporate Banking 2018: Unlocking Success Through Getting Bank Automation Digital Beyond the Pilot Phase A report by The Boston Consulting An article by The Boston Consulting Group, March 2018 Group, August 2017

Global Risk 2018: Future-Proofing The Seven Rules of Cost the Bank Risk Agenda Excellence in Banking A report by The Boston Consulting An article by The Boston Consulting Group, February 2018 Group, August 2017

The Boston Consulting Group • Swift | 27 NOTE TO THE READER

About the Authors Antoon Schneider, Niclas Storz, Stefan Dab Mohammed Badi is a senior Tammy Tan, Tjun Tang, Ricardo Senior Partner and Managing Director partner and managing director in Tiezzi, Stefano Valvano, Pieter Van BCG Brussels the New York office of The Boston den Berg, Jody Visser, André Xavier, +32 2 289 02 02 Consulting Group and the global and Nadjia Yousif. [email protected] leader of the payments and trans- action banking segment of the In addition, the authors are Alexander Drummond Financial Institutions practice. extremely grateful to core members Partner and Managing Director Stefan Dab is a senior partner and of the BCG Global Payments Model BCG New York managing director in the firm’s team: Keith Bussey, Nikhil +1 212 446 2800 Brussels office and cofounder of the Dangayach, Pearl Gupta, and [email protected] payments and transaction banking Shenan Kalra. Also, Petra Demski, segment of the Financial Insti- Rohit Mathur, Jens Mündler, and Sushil Malhotra tutions practice. Alexander Amit Sukhija provided helpful Partner and Managing Director Drummond is a partner and support, as did numerous local BCG New York managing director in BCG’s New analysts from the Financial +1 212 446 2800 York office.Sushil Malhotra is a Institutions knowledge team and [email protected] partner and managing director in data & research services. the firm’s New York office.Federico Federico Muxi Muxi is a partner and managing Sincere appreciation also goes to Partner and Managing Director director in BCG’s Buenos Aires BCG’s Financial Institutions global BCG Buenos Aires office.Maarten Peeters is a former management team with Vassilis +54 11 4317 5900 senior knowledge expert and global Antoniades, Marie Laure Barbe, [email protected] manager of BCG’s payments and Kilian Berz, Gerold Grasshoff, Anna transaction banking segment in the Haug, Huib Kurstjens, Debbie Maarten Peeters firm’s Brussels office.Prateek Lovich, Jürgen Rogg, Aymen Saleh, Former Senior Knowledge Expert Roongta is a partner and managing Yasushi Sasaki, Jean-Werner de and Global Manager director in BCG’s Mumbai office. t’Serclaes, Steve Thogmartin, and BCG Brussels Michael Strauß is a partner and Saurabh Tripathi. The authors are +32 2 289 02 02 managing director in the firm’s also deeply thankful to Luc [email protected] Cologne office.Yann Sénant is a Meurant, Pedro Mullor, Harry partner and managing director in Newman, and Wim Raymaekers Prateek Roongta BCG’s Paris office. from SWIFT. Partner and Managing Director BCG Mumbai Acknowledgments Finally, we thank Marie Glenn +91 22 6749 7000 The authors thank their BCG for her writing assistance and [email protected] colleagues for their valuable Katherine Andrews, Gary Callahan, contributions to the development of Philip Crawford, Siobhan Donovan, Michael Strauß this report, particularly Francien Kim Friedman, Abby Garland, Sean Partner and Managing Director Akkerman, Markus Ampenberger, Hourihan, and Shannon Nardi for BCG Cologne Romary Barbey, Radko Bartunek, their editorial and production +49 221 55 00 50 Ola Bennerholm, Jean Clavel, Jean support. [email protected] Dobbeni, Tom Dye, Andrew Dyer, Philip Evans, Deepak Goyal, Max For Further Contact Yann Sénant Partner and Managing Director Hauser, Cristina Henrik, Nicole Mohammed Badi BCG Paris Hildebrandt, Yeonhee Kim, Yunjoo Senior Partner and Managing Director +33 1 40 17 10 10 Kim, Ankit Mathur, Dimitriy BCG New York [email protected] Panyavin, Pierre Paoli, Perry Peng, +1 212 446 2800 Ilya Privin, Max Pulido, Sukand [email protected] Ramachandran, Theodore Roos,

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