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Innovalue #Payments Innovalue #payments INSIGHT | OPINION Vol 7 • Q2 2014 Apple Pay: Taking a bite out of payments Christina Cordes, the start (usually merchants who already Associate accepted NFC). Furthermore, Apple announced significant bank partnerships Kalle Dunkel, with Bank of America, Capital One Bank, Associate Chase, Citi,Wells Fargo and others which together represent about 83% of the US credit Mirko Krauel, card purchase volume. Principal For now, Apple Pay is a solution for the US market only. In Europe, Apple will face more Following months and weeks of extensive speculation and leaked rumours, the new "Apple Pay is not revolutionary. It is evolutionary." iPhone 6 with its feature Apple Pay has finally been presented on 9th of September. button. That’s it. The innovation and lifestyle complex challenges. First of all, Europe is more To be frank, Apple Pay is not revolutionary. oriented Apple user base will push “their” solu- fragmented and has several markets with It is evolutionary as Apple uses the existing tion, especially in the US market where the only a low penetration rate of NFC enabled payment ecosystem and partners with estab- company has a market share of around 40%. POS terminals - at least for now. Furthermore, lished players. Also, none of the ingredients of However, a good mobile payment solu- Apple has a lower market share in a lot of Apple Pay are new but this seems to be the tion on the customer side is basically worthless European countries compared to the US. first recipe that people like and want. Obvi- if there are no POS acceptance points on the Finally, the banking landscape consists of ously, this is due to a multitude of reasons, merchant side. The terminal infrastructure in thousands of banks with only very few pan- starting with a good (simple!) user experience. the US is far from being mobile readyas only European players. A multitude of these banks At the POS, the user holds his iPhone 6 against about 5% to 10% of POS terminals are NFC- have to be won as partners to gain a signifi- an NFC terminal just as any other contactless enabled. However, Apple, as a highly cant share of the market. payment card and authorizes the payment influential brand, gained several lighthouse Apart from the aforementioned chal- Apple Pay is a trademark of Inc. with the fingerprint scan on the Apple home merchants accepting Apple Pay right from lenges, an overall threat for Apple Pay might TABLE OF CONTENTS Apple Pay: Taking a bite out of payments Public market valuations and the market environment Apple Pay: Is this the mobile payment solution the world waited for? Christina Cordes, Public companies in the payments universe have only seen small share price in- Kalle Dunkel and Mirko Krauel give their opinion on Apple’s latest feature Apple Pay creases during the second quarter. Markus Massem takes a look at valuation and its impact on the (mobile) payment ecosystem. p1 drivers and benchmarks the different groups within the payments universe. p5 Future sourcing strategies for the technical processing of credit cards M&A Activity When taking current market developments into account, Steven Jacob and Jan What are current drivers of M&A activity? Which transactions made headlines in Lettow come to the conclusion that an in-house sourcing model for the technical the 2nd quarter of 2014? What are recent takeover rationales? Andreas Haber- processing of credit cards could be an interesting perspective for certain issuer. p2 setzer and Robert Kayser answer these questions. p6 Monetizing available online data through credit and risk scoring VC Activity What are future sources for credit and risk scoring? Niels Denefleh gives an over- Yet again the Innovalue team reviews the latest payment startup funding activity view on how social media data and real-time information can act as a new (Q2 2014). What are current product or service innovations for investors, and what source for scoring. p3 are the global investment trends within the payment ecosystem? p8 Innovalue #payments INSIGHT|OPINION 2 be the most recent security breach Apple had to face. The recent iCloud hack has Facts & Figures Apple Pay Payment Scope • Channels: POS payments + inApp/online shaken consumers’ confidence in Apple’s • Partners: Traditional payment schemes (MC/Visa/Amex) & Banks security. This and generally higher (data) • Card Types: Credit (+ debit) cards are supported security concerns of many Europeans may Solution • Devices: iPhone 6 or min. iPhone 5 + Smart Watch lead to lower implementation rates of Apple • Approach: Wallet-approach via Passbook, one default card for fast processing Pay or higher marketing efforts to promote • Express Check-out: for inApp/online payment prefilled forms enhance user ex- perience and decrease shopping basket abandonment the solution’s security. • Onboarding: Take a picture of the credit or debit card and it is stored All in all, we hold the opinion that Apple automatically Pay is a serious accelerator for the develop- Technology & • Hardware: iPhone embedded secure element (no SIM / UICC as a SE for now) data security • Software: Tokenization (SE stores payment tokens, card details in a separate ment of NFC payments based on the payment cloud) traditional payment ecosystem in general • Transmitting technology: NFC and mobile payments in particular. In this spe- • Authentication: Fingerprint • Privacy: Payment data stays with customer/bank, not Apple/merchant cific case we believe: there is life in the old Timeline & • Date: Out in the US in Oct. dog yet! NFC has been declared dead by markets • Geography: Other regions such as Europe to be announced many over and over again but in the end, with Apple, the line of supporters has been fortified (e.g. Google, Schemes, Banks, alternative, proprietary payment systems are initiatives such as MCX will react and positon Acquirers). Due to this, we believe that start- under serious pressure. It will be interesting to themselves in the mobile payment game. ups and other initiatives solely focusing on observe how large and generally powerful Future sourcing strategies for the technical processing of credit cards Jan Lettow, the current account. Its processing services base since the current account is also being Senior Associate are historically dominated by in-house oper- processed on these systems. ating models. The distribution of the debit In consequence, differences in the costs Steven Jacob, card as a bundle product without differentiat- per card of up to 95% are not uncommon Principal ing features forced banks to reduce the unit when directly comparing the technical pro- costs to a minimum. As a result, the IT systems cessing of debit and credit cards. There are were operated without significant re-invest- three main drivers for this difference: Issuers in the German payment market face ments and technical changes were usually 1. Low level of innovations leading to low substantial challenges: regulatory inter- driven by mandatory regulatory requirements investment requirements ventions, changing customer behaviour as or the schemes. In contrast to credit cards, 2. Low complexity through reduced well as new competitors in the important the largely fixed costs of the technical functionality E-Commerce market force traditional players account-keeping and clearing & settlement 3. Economies of scale from integration with to adopt their business model and reduce are allocated to a much broader revenue the core banking systems the cost base in order to maintain competitiveness. An often mentioned option to maintain profitability lies in the technical processing, which reflects 15-25% of the overall issuing cost base, as past outsourcing initiatives achieved savings of up to 60%. When evalu- ating the potential a distinction between debit and credit cards needs to be made. The debit card is and always will be regarded by banks and perceived by cus- tomers as the product necessary to access Page1 Innovalue #payments INSIGHT|OPINION 3 In contrast, the technical processing of credit absolute minimum. This might lead to credit cards. This is technically possible, as the new cards in the German and several other Euro- cards with close to daily settlement, no sepa- core banking platforms often already offer pean markets is usually outsourced to special- rate billing, no value-added services and no card processing functionalities. In addition, ized vendors. These specialists handle the more technical / optical design features of this step could enable a holistic view of the technical processes on multi-client platforms the plastic. Through these measures the credit customers and dissolve the purely technical which are almost completely detached from card will in essence become a debit card induced separation of credit card and cus- the core banking systems. Changes on these with the benefit of global acceptance, us- tomer data. platforms occur frequently: new card pro- ability for E-Commerce and buyer protection Necessary for the successful execution of grammes are set up, old card programmes in the context of chargebacks. this strategy is the management commitment are decommissioned, new functionalities are on treating “plain vanilla” credit cards in the introduced, regulatory changes are imple- "Differences in the costs per spirit of debit cards. At the centre of this are mented, etc. card of up to 95% are not the mentioned success factors for the low- Even though the outsourcing to vendors cost production of debit cards. The credit with an appropriate IT competency has cre- uncommon when directly card product will, in conclusion, become ated redundant card and account comparing the technical “boring” and tied closer to the current processing platforms, it pays off in the opinion processing of debit and account. If the commitment is provided, the of banks for the following three reasons: credit cards." existent processing platform of debit cards 1. Short time to market for technical offers significant cost advantages and changes removal of redundancies in the account and 2.
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