Understanding the emerging frontiers in payments systems
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Foreword 04 Introduction 05 Challengers versus Legacy Banks 06 Forget the wires, connect the wallets 13 Building customer trust in mobile 19 payments through improved authentication and verification process Endnotes 24 Contacts 25
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03 BrochureUnderstanding / report the title emerging goes here frontiers | Section in payments title goes here systems
04 Understanding the emerging frontiers in payments systems
Foreword Foreseeing the Unseen!
It was the Whatsapp moment for the banking sector when Nandan Nilekani launched the Unified Payments Interface (UPI) on 11 April to the applause of RBI governor Raghuram Rajan and several leading industry captains in the country. Its originator, the National Payments Corporation of India, then said that this was just a modest beginning and a real revolution is yet to happen in the form of Bharat Bill Payment System (BBPS) and several other innovative payments systems that are being designed and developed. In the domain of banking, payments today is one of the most happening areas in terms of innovation, technology and business.
I remember Vijay Shekhar Sharma of Paytm mentioning that we are now passing through one of the most exciting times in the payments business with a lot of action happening around. A true follower of the banking sector cannot afford to miss this transformation. What is exciting is that the regulator is moving away from traditionalism and is becoming highly supportive of the innovations and offering the innovators a chance to prove themselves. In fact, the regulations are being created around these innovations so that the banking system evolves in the right direction free of security scares, operational inadequacies and in a manner that is conforming to global standards. The presence of fintech entrepreneurs, accelerators and incubators in the regulator's office is sign that the business of payments is getting redefined and it is not any longer a conservative business.
There have been maximum frauds in the payments realm. In fact, frauds in the corporate banking scene is ten times more in terms of value than those happening in the retail banking scene. The regulator is constantly evaluating the shortcomings in the security infrastructure and suggesting effective counter measures to contain possible frauds. The regulator is also highly sensitive to customer complaints, especially those that are likely to come up against the new genre of banks. In fact, the day is not far off where there would be a regulator for the fintechs, considering the large number of entrepreneurs who are entering this field.
The click revolutionized the commerce, the tap disrupted it and we are awaiting the next level of transformation. I am sure it will be more transparent, safer and easier for one to make payments in the days to come.
We at Banking Frontiers have been trying to be catalysts for this transformation to happen. It has been our endeavor to create a roadmap for the segment. And we are assisted in this effort by Deloitte India. I am thankful to Monish Shah and his team for consistently working with us in this effort and bringing out periodical reports. I must also recall that we have transformed from Mpay Insights to PayNext Insights to match the flavor of the payments business.
We sincerely hope this can be a good yardstick for each one of you reading this report to plan your future business roadmap for it will surely help in foreseeing the unseen and help you strategize accordingly. We welcome your feedback so that we can make it more effective. Please send your responses to [email protected]. Thank you,
Babu Nair Publisher Banking Frontiers
05 Understanding the emerging frontiers in payments systems
06 Understanding the emerging frontiers in payments systems
Introduction
India is at the cusp of transformation in disruptive innovations and the notion and benefits of “unscale” are a significant departure from the rule that bigger is always better.
Indian payments industry is undergoing an ecosystem expansion and transformation at the same time. Entry of new banks, acquiring and processing companies, is likely to bring unique business model nuance to the fore. New Payments players are expected to disrupt the market through dramatic technology delivery, shifts in customer servicing, differentiating value propositions thereby competing aggressively with legacy strategy, infrastructure and paradigms.
Aided by growth in “Omni-Access” channels and availability of new payments utility platforms, Indian payments industry is uniquely positioned to leapfrog the trajectory followed by other countries. Despite the din of uncertainty around their viability, new payments and small finance banks have the potential to be hailed as the challenger banks in India. With limited legacy and strong captive customer base, these banks are likely to offer engagement models which are product agnostic and will include products beyond core payments.
These new entrants will also act as a catalyst to shake-up the incumbent banks to improve value proposition, offer better customer experience and adopt engagement models that will go beyond transactional aspects of payments. Both challenger and incumbent banks have started to develop end to end digital value chains starting from user facing applications and interfaces. However, we believe that digitizing the middle office and back office activities will lead to a highest order of sustainable competitive advantage. We are likely to see new partnerships and alliance models emerge in a bid to create customer value propositions.
Customer experience in payments will go beyond the user experience design. Banks and payment companies need to consider service personalization, issue resolution and grievance redressal as an integral part of customer experience. Moreover, building customer trust in electronic payments remains a primary challenge and strengthening of authentication and verification process will go way in advocating user trust and confidence. With the emergence of biometric authentication as powered by Aadhaar, areas of customer frictions can be further streamlined.
Deloitte Thought Leadership Report for Paynext 2016 captures these emerging themes and focusses on three critical areas: 01. Legacy Banks versus Challenger Banks: New age of innovations in payments with entry of new banks 02. Forget the wires, connect the wallets: Putting user experience at the heart of multi-channel payments 03. Building customer trust in mobile payments through improved authentication and verification process
We hope that the readers find this Report useful and insightful.
Monish Shah Lead Consulting Partner Financial Services
07 Understanding the emerging frontiers in payments systems
Challengers versus Legacy Banks
New Age of Payment
The last three years have seen a lot of •• Announcement on the merger of the activity in the Indian Banking space. Some larger state run banks with the smaller notable developments have been: and inefficient players, to salvage their poor performance4 •• Liberalization of the issuance of the coveted banking license, allowing •• FinTech emerging as strong contenders several new players – 2 Universal Banks, to banks, globally, and in India 8 Payments Banks (of the 11 licenses •• National Payments Corporation of India’s granted by RBI, 3 have surrendered it) (NPCI’s) Unified Payment Interface and 10 Small Finance Banks - to enter the (UPI), launched with the aim of achieving banking space in India and challenge the electronic payments, reducing cash in existing paradigms1 the payments system, and financial •• Foreign banks having an option to enjoy inclusion5 on par treatment with other banks in India, if they opt for the Wholly Owned The next phase of banking and payments Subsidiary route2 will be challenging, and with competition inching up, a host of new players will enter •• Public Sector Banks grappling with the and new business models may emerge. issue of rising Non Performing Assets These new players will be the ‘Challenger and eroding capital3
08 Understanding the emerging frontiers in payments systems
Banks’ who will attempt to disrupt the ‘Challenger Banks’ will have to make the their end state and work backwards, in existing paradigms of traditional banking. transition from cash to digital and inculcate order to avoid pitfalls later. A few license a behavioral change in the customer. This winners have withdrawn their interest7 All products that a bank offers, are ready will need efforts from all players in the and this shows that players are grappling for digital disruption and the ‘Challenger ecosystem. with the issues of viability and scale up. At Banks’ are expected to spearhead the same time, these players have created this change. The business model of ‘Challenger Banks’ would need an a sense of urgency among the ‘Legacy these ‘Challenger Banks’ rests on the integrated product platform that goes Banks’, who are trying to determine their requirement that they facilitate a large beyond ‘banking’. This will be mandatory to approach, which could be reactive or volume customers or transactions, if create customer engagement. A modular proactive, and range from ignore, partner they are to be viable, while overcoming system architecture should be considered or compete. All players, new and old, need the challenges of earning the trust of the to enhance the convenience of partnering to reconsider their aspirations, assess customers as a financial partner. with other companies to provide financial the market and their own strengths to and non-financial services, to meet all the define their plan. A key thing to keep in The focus of the ‘Challenger Banks’ would customer needs. As these banks would mind would be that customers’ underlying be rapid technology adoption, better need to cater to a diverse set of customers financial and payments needs haven’t customer orientation, and favorable with varying needs, the platform needs to changed dramatically, but the way in cost-income ratios. At the same time be flexible enough to be customized; an which they want to fulfil those needs ‘Legacy Banks’ may be tempted to or in-depth understanding of what’s desirable has. Customers now demand products even forced to revamp their efforts and from the perspective of each customer with high convenience, ease of use and refine or change their existing strategies segment is critical. innovative features. to withstand the new competition. This will lead to players focusing on areas such Key strategic choices which will shape the as product innovation, pricing strategies, future of the Banks usage of digital channels, extensive use With the RBI mandating a certain minimum of technology, data analytics, new-gen capital requirement, the ‘Challenger marketing and branding, etc. Banks’ have to necessarily inject this capital in their ventures. To combat the ‘Challenger Banks’ are expected to have a new competition, many of the ‘Legacy near clean slate and a nimble organization Banks’ may also need more capital as a with limited legacy issues. They are likely part of their business reorganization or to bring in their learning, expertise & technological up-gradation activities or experience from diverse sectors and come for chasing new growth avenues. This up with unique business & operating will put pressure on both the entities, to models, which may prove to be successful, create a business model in a capital not only in providing last mile connectivity efficient manner that adds value to its to the rural hinterlands, but also in creating shareholders. a sustainable and profitable business Banking industry of the future will look model across geographies & customer very different from today. It is critical that segments. ‘Challenger Banks’ have a clear picture of
09 Understanding the emerging frontiers in payments systems
Key Questions every bank needs to answer
Goals and aspirations? Where to play? How to win?
What should be our goals and Customer segments Positioning aspirations? • Urban or Rural • Full-fledged bank or • Capital • Affluent or mass affluent or mass • Select bank offerings with value added services • Revenue market (Which age groups/ profession Operating Model segments?) • Profitability • Physical or Digital or • Do we target all or select customer • Number of customers segments? • Combined • Better economics of Focus offerings Channels existing business • Savings or Payments or access to • Branch or BC or online or mobile (app, web) Lending or access to Investments • Do we deploy all or few of the above or Non-Financial services Partnerships? • Do we offer all or few of the above? • Product partnerships or partnerships for customer acquisition or service delivery
• Which partnerships do we select?
Winning strategies to build the next Going beyond a typical Banking and Payments Wave in India bank: Serving financial and Some of the key challenges facing ‘Legacy non-financial needs of a Banks’ today are a traditional approach to customer banking, lack of a clear digital strategy, and In addition to offering the cultures unsuited to rapid change. This is usual banking products, both where the ‘Challenger Banks’ are expected ‘Legacy’1 and ‘Challenger Banks’, will need to to differentiate themselves to win in this graduate to a one stop institution offering market. ‘Challenger Banks will look at multi- a wider portfolio of basic products or a dimensional innovation that goes beyond combination of basic products – credit, product innovation, in order to derive investment, protection, plan, money sustainable competitive advantage. transfer, bill payments, wealth advisory, loyalty rewards, shopping offers and other non-financial products and services – which the banks may provide through third party arrangements, in order to retain and expand their customer base, and to meet their ever expanding financial, payments and non-financial needs. ‘Challenger Banks’ will need to identify a profitable pool of customers and monetize these relationships. They can look to significantly enhance the value proposition for customers by drawing insights from customer data to recommend best products/ services for customers, connecting customers to financial/ non- financial products/ services that enhance convenience and bringing relevant offers, discounts, and loyalty rewards to customers.
10 Understanding the emerging frontiers in payments systems
Changing Indian Financial Landscape: Niche Offerings by a Non-traditional Player
A digital wallet provider has moved to an online market place and provides funding to its merchants
2016 2015 Tied up with a loan 2014 providing platform to evaluate credit Launched a commission worthiness of SMEs on Started off as a digital wallet free marketplace to its portal for lending Tie-up with a leading cab compete against other aggregator to grow user base large ecommerce players
Source: Newspaper Reports
This digital wallet provider has also tied up with offline merchants such as Kirana stores for processing small value payments6. An appropriate mix of various types of channels, both virtual and physical, staffed with the right roles will be critical to ensure a high quality channel experience to customers
The various channels offered to customers will be designed to enable seamless transition irrespective of the type of service needed
Facebook ad encourages Seema to visit website A few months later: Seema visits the hardware store Seema stops by the branch to I Just moved to town and need a new bank. ABC Bank looks highly recommended complete her application
Hi, I’m here to complete my unfinished online enrollment
Seema visits site and initiates the enrollment process Great, I’ll pull up your Seema receives Seema starts online application and we’ll a mobile offer get started application Hi, Seema We’ve noticed you’ve recently made some purchases Welcome Seema, toward improving your home. You’ve taken the first This is a great way to increase your step in getting enrolled. Personal banker home’s overall value. Are you Ramesh cross-sells interested in discussing some options for home equity lines of Seema gets distracted by work emails Seema, now that we’ve opened your credit for your improvements? and doesn’t finish enrollment. account, I see you qualify for our High Rewards Credit Card. You will Personal banker Ramesh be able to view activity and make receives notification payments through our mobile app. Seema refers her Welcome, Seema you’ve taken the first step in getting enrolled friend to ABC Bank
You can trust me. Call That would be great Seema shows my friends at ABC I’ll download the Bank, and let them her friend her app now. Personal banker help you with new kitchen Ramesh calls financing options. Seema They’re not pushy and Wow, Seema found the perfect your kitchen Hi, Seema. It looks like Thanks, Ramesh. option for me looks amazing! you haven’t completed I’m running I wish I could your enrollment. Is some errand this get mine to there any way I can afternoon and look this good. help? Feel free to give will stop by the branch. us a call, or swing by Seema downloads our local branch to complete the process the mobile app
11 Understanding the emerging frontiers in payments systems
Building ‘Digital’ as an end- Check Tools such as bill payments alerts, •• Understanding user models that helps to-end solution, a way of savings balance alerts, expenditure alerts, customers build better habits life for customers loyalty points and related offers alerts will •• Total transparency so customers know help them engage with customers in a Customers are increasingly what they are paying for and get what meaningful manner. moving towards customized they pay for services and unique experiences.2 There are a number of Technology will be a key differentiator for ‘Challenger Banks’ may have fund these ‘Challenger Banks’. Challenger Banks banking products which address their constraints and would be cautious about will look to build strong analytics/ data needs but they are fragmented, opaque their technology investments. Models such capabilities to drive targeted acquisition, and cumbersome. Each successive channel as ‘bank in a box’ model8, can help these build credit scores using surrogate and offering has been layered onto an players access a wide range of technology methods and determine next best ageing core infrastructure that is no longer solutions with all technology management action, etc. In order to achieve this, these able to integrate and respond to customer and support services. These are available banks need to break from orthodoxies needs. This often leads to higher cost to at prices based on usage and will enable around why people bank and ask a more serve across channels, data existing in players to quickly enter the market, without fundamental question on how does siloed systems and multiple customer taking a huge dig on their funds, but at the money and value flow in and out of a friction points. same time helping them be competitive customer’s life across communities, where and also compliant from a regulatory does money go and what is it being used While much of the efforts of the legacy perspective. Options such as full cloud for and what problems can they solve banks may be constrained due to model or a fully on premise model are also for these customers. This demands an traditional models being expensively built available in the market. These options help understanding of: to last generations, ‘Challenger Banks’ are reduce transition time and enable players expected to offer new blood with their •• Smart products that self-optimize to offer technology led banking in a cost innovative models and a fresh ‘hi-tech and around customer goals such as effective manner. hi-touch’ digital approach. savings, spends Extensive usage of digital mediums and focus on low-cost delivery channels shall •• Predictive analytics that anticipate what ‘Challenger Banks’ will need to look beyond lead the players to rationalize their costs lies ahead and helps customers plan just facilitating financial transactions. Health and pass the benefits to the customers.
The customer journey will be designed in a manner where the bank can service all his / her needs via a single platform
2. Account Aggregation 3. Social Connection
4. Wealth Manager Selection 1. Account Registration
Connects all his accounts digitally – Sets up an account on the website views balance, portfolio, expenses to track discussions
Pain Points: – “No connect with relationship Mr. X logs on to the manager” Selects wealth manager based on website and registers Profile: Working with – “I do not trust wealth comparison of various profiles in 2 minutes ABC Company in Mumbai. He is managers. They work well-educated. towards their own benefit” – “I do not have the required 5. Financial Health Check up He earns INR 10-15L financial investment knowledge” – “I find it difficult to monitor 8. Alternative Investments per annum and is looking for investment opportunities Mr. X, my investments via physical” Operations Manager
7. Portfolio Planning 6. Financial Planning
Mirrors portfolio, follows hedge fund Gets a health check up for his algorithms and also takes part in current financial situation crowdfunding
Develops customized portfolio Shares his risk profile and and registers for regular personal goals Source: Deloitte analysis notifications
12 Understanding the emerging frontiers in payments systems
Striking the right ‘Legacy Banks’ bring expertise in the critical Conclusion partnerships fields of regulatory compliance and risk There have been instances from several A variety of robust external management, and new players can look up other countries, where a new category of partnerships for customer to them for guidance on these aspects. In player has created a new and successful acquisition and retention addition ‘Legacy Banks’ can use some of business model and changed how banking (FMCGs, Ecommerce these ‘Challenger Banks’ to offer loans and was being done before. Merchants,3 MFIs and BCs), access to other such services in places where they products and services (e.g. government cannot reach. We hope that this new era will result in agencies, cash management services etc.) an even larger impact on the financial and service delivery, along with operational Some ‘Legacy Banks’ have tied up some landscape of the country, from the last tie-ups to reduce time to market, will be of these ‘Challenger Banks’. For instance, round of the licenses in 1994 and 2002, and considered by these ‘Challenger Banks’. SBI, is expected to take up to 30% in RIL's may prove to be a game changer for the Challenger Banks have the opportunity to proposed9 bank while Bharti Airtel, India's entire ecosystem, benefitting customers, outsource technology and other functions largest telecom operator, is expected players and the regulator to managed services providers to keep to give 19.9% stake in the bank to Kotak their investments low and to gain the Mahindra Bank Ltd9. Meanwhile, Aditya benefit of the expertise of these providers. Birla Nuvo Limited has tied up with Idea Cellular which will have 49% stake in the Payments Bank joint venture9.
Illustrative benefits of a partnership between a Telco led Payments Bank and a Cab Aggregator
Telco-Cab Aggregator Tie Up Ecosystem
Customer churn in Telco business decreases
Telco Business Telco Payments Bank
Drivers save and send 2 remittances with the Telco 4 PB ties up with a 3 bank to provide lending services to its customers Drivers use Telco data Customers maintain and voice balances and use ‘Telco 5 1 Wallet’ to make cab payments PB ties up with insurers to provide insurance to its customers
Cab Aggregator Drivers get access to mortgage, 3rd party Bank 6 unsecured personal and working capital loans based on behavior on Telco network 3rd party Insurer
7 Provides Life and General Insurance ( Auto) to Drivers
Telco Business: Creates strong customer base • Customer : Convenience, No hassle of • 3rd party Bank/ Insurer: and stickiness; drives brand preference carrying cash; loyalty points with Telco/ cab Opportunities to cross-sell credit aggregator products; gets “credit information Payments Bank: Gets a ready customer base, based on financial transactions “cash-in”, remittance, cashless transactions, • Telco: Driver stickiness, reduced need for history and behavioral patterns cross-selling opportunity cash handling
13 Understanding the emerging frontiers in payments systems
14 Understanding the emerging frontiers in payments systems
Forget the wires, connect the wallets Putting user experience at the heart of multi- channel payments
Payments have historically been viewed – with their rich functional capabilities While digital platforms are transforming as utility products; fundamentally are supporting the development of the retail financial services landscape, transactional and tactical in nature, sophisticated applications and payment disruptive technologies such as blockchain undifferentiated and volume-driven. In platforms that cater to diverse customer is set to radically transform the traditional fact, payments were often perceived as requirements. Newly developed payment ‘wired’ process for B2B payments such as merely the final step in a transaction, with and mobility platforms are becoming international funds transfers and trade limited opportunity to provide value-added data rich, using not only transaction settlements. services or solutions. information but also geo location information about each customer. This is The convergence of technology, mobility Today, the evolving payments landscape is helping them to develop new services and and payments, will result in several key in a state of fundamental transformation. value propositions for deeper customer benefits to the entire ecosystem ranging Leveraging on ever increasing mobile engagement. from – movement to a less cash economy, penetration with 2 billion smart phone greater customer convenience, better users10 and seamless data connectivity, In the underdeveloped and developing customer engagement, reduced costs of several digital innovations are emerging to world, where traditional financial service delivery, greater data availability for transform wired payment methods (cash, services have not been able to reach proper risk assessment, etc. credit cards, cheques etc.) to digital (mobile the last mile customers, digital payment wallets, NFC-based card payments, QR code providers are increasingly playing vital In this paper, we have identified4 key payments etc.) role in delivering financial services to the themes emerging from rapidly changing excluded population. Incumbent players digital payments landscape, the With these innovations, ‘new age’ players are increasingly looking to tie up with differentiated user experience they bring are redefining consumer experience and these ‘new age’ players to deliver broader and their implications for financial services expectations in today’s world. Mobile bouquet of financial services through digital industry. smartphone and tablet technologies platforms.
15 Understanding the emerging frontiers in payments systems
Mobility and Payment integration are . ’s purchase and pay platform11, one where turning ‘mobile apps’ into flagship stores Apple its customers can easily purchase music, movies The integration of digital wallets and and their favorite television shows, all in one mobility is enhancing customer experience location and engagement to an altogether newer 11 level. . Users simply open the Uber frictionless app on their smartphone, input their destination of With greater proliferation of smart phones, choice, and a series of ready-made solutions and players are now attempting to routes are provided integrate smartphone capabilities with host . An Uber driver is reaches to pick the customer of other features to deliver a ubiquitous within few minutes. Users can pay for the ride through the app using wallet experience that eliminates friction from the customer buying journey turning mobile applications into their ‘flagship stores’ . Flipkart app12 engages consumers with innovative features like chat, offer zone, discount alerts These ‘flagship app stores’ are going a step ahead of physical stores by Retail banks and other financial services continuously interacting and engaging with companies can also emulate some of the the consumer to deliver a unique shopping best practices implemented by players experience – by enabling instantaneous in other sectors such as e-tailors, taxi payments through digital wallets, earning aggregators, hotel aggregators etc. They and tracking loyalty points, comparing should bring the “flagship branch” virtually prices, receiving spot discounts, assisting in on mobile apps servicing customer ‘on selecting optimal payment method etc. the go’. Apart from account opening or A comprehensive in-app experience is purchase of insurance policy, such mobile helping players build better and deeper applications should also support a host of relationships with their customers by customer servicing aspects ranging from understanding their purchase behavior and cheque book requests, address change response to discounts and offers. request etc. In addition, the apps can also The differentiated user experience that deliver value added services like expense players are achieving by developing an management which helps in financial integrated in-app experience is: planning. •• Integrated user experience which connects discrete services into an Some of the banks have already began integrated mobile application taking steps in this direction e.g. some of the global banks such as Bank AmeriDeals4 •• Instant and Seamless payments leverages location to pinpoint reward solution where customer remains offers, while Barclays13 provides an invisible to entire process and transacts integrated borrowing calculator within its seamlessly mobile app. In India, ICICI Bank14 has added •• Faster Processing leading to reduction a host of services on its mobile banking in transaction time and enhancing overall application e.g. tagging transactions as customer experience favorites. This helps customers in doing repeated transactions instantaneously. •• Personalization of offers suited to With expanding potential of ‘connected’ customer profile apps and wallets, it will be an imperative rather than choice for financial services firms to deliver broader range of services through the mobile apps.
16 Understanding the emerging frontiers in payments systems
Physical stores are integrating digital . Customers at US retail giant Walmart will soon be able to payments (contactless NFC and QR-code pay for purchases by scanning a QR code at the point of sale using Walmart Pay15, the retailer’s own mobile payment based payments) with in-store value service added services to provide a seamless . Walmart Pay will be integrated into the Walmart app and consumer experience introduced in selected stores this month, with a nationwide launch expected in the first half of next year Despite digital revolution transforming online and mobile commerce rapidly, offline . Paytm16 plans to double its in-store merchant acceptance to commerce still continues to dominate four million. Paytm users can complete in-store transactions by scanning a code with their mobile phone consumer buying for many of the purchase . Paytm is also currently trialing sound-based payments categories.
Superior in-store shopping experience . More than 20% of the Starbuck’s17 in-store transactions use remains a key success factor for the the mobile app for payment. It works in a closed-loop system with a barcode that’s essentially a virtual gift card physical establishments. Digital payments . Using the app has become a habit for loyal customers who are augmenting this experience by stop for their daily caffeine fix providing faster and efficient check-outs. Leveraging on the use of smartphones, There is significant opportunity for financial retailers are developing their own services firms to develop suitable solutions proprietary mobile wallet and payment for in-store payments. They can consider platform to accept mobile payments. typing up with technology companies, Latest technology innovations such as handset manufacturers, and retailers NFC capabilities and QR code scanning etc. to develop solutions which would be technology are helping retailers integrate tailored to customer requirements. This shopping and payments. The one example could help them in to remain ‘service being that customers scan the goods provider of choice’ in the offline world as they want to purchase while walking in well. the stores. At the time of checkout, the payment is automatically deducted through Some of the banks and digital payments customer’s wallet or can be paid at the players are pioneering initiatives in this counter through scanning of a QR code or area e.g. ICICI Bank18 recently launched a NFC enabled payment method. contactless mobile payment solution to enable its credit and debit card customers The differentiated user experience that make in-store payments by just waving players are achieving by developing an their smartphones near an NFC-enabled integrated in-store experience is: merchant terminal. Mobile Wallet player 19 •• Faster check out - no queues at the MobiKwik has exclusive tie-ups with Big counters enhancing customer experience Bazaar, Café Coffee Day (CCD), Archies, and Mobiliti World etc. to gain easy access •• Convenient payments - no requirement to offline customers. Similarly Paytm7 to keep the change at counters for allows its e-wallet users to transact at customer as well as for the store Pizza Hut, KFC and Costa Coffee outlets. •• Reduced costs for merchants with While enabling seamless payments is an reduced FTE requirements at check-out important aspect of the in-store payments, counters going beyond transactional relationship and building solutions which bring in purchasing and payments experience together will be a winning concoction in the market.
17 Understanding the emerging frontiers in payments systems
Mobile payment service providers are . M-Pesa20, a Kenyan money transfer platform, going beyond the realm of P2P and P2M launched health insurance in partnership with an payments to help build affordable and insurance company; Premium to be deducted easy-to-access financial services eco- directly from M-Pesa wallet system . Launched credit products in partnership with Kenya Commercial Bank; M-Pesa transaction history to Traditional approaches to bottom-of-the- help with credit appraisal. pyramid (BoP) financial delivery have relied on cash-dependent transactions with retail . Payments Banks21 in India (India Post, Paytm etc.) banks driving financial inclusion attempts, are already exploring partnerships with host of banks and insurance companies to deliver their albeit with minimal impact. products and services to their customers
Driven by a rapid increase in smartphone penetration, internet and the emergence Further, digital wallet providers help the of new-age technology companies in financial services providers with customer the payment space, digital financial transactions history which helps them in inclusion is gathering steam, as it looks understanding the customer and spending to improve accessibility and availability of pattern. Banks are leveraging this data to formal financial services to unserved and aid in credit appraisal process and develop underserved customers. customized repayment schedules while insurance companies are leveraging it to Digital financial inclusion model is develop customized offerings based on leveraging a collaborative fin-tech and customer’s lifestyle. traditional financial services ecosystem.
Keeping payments at the core, digital The differentiated user experience that payment players are partnering with other players are achieving through partnerships financial services providers (banks, non- for furthering financial inclusion are: banks, insurance companies etc.) to extend broader financial services such as credit, •• Easy, hassle-free and affordable savings, insurance, and even investments access to financial services for financially to the underserved. excluded customers
•• Quicker loan disbursals basis availability This is a win-win situation for both since of customer transaction history incumbent players can provide a bouquet of products ranging from savings, •• Customized product offerings tailored insurance, investment management etc. to to customer financial needs customer hitherto unserved while digital payment players deepen relationship with their customers by delivering host of products ‘in their handset’
18 Understanding the emerging frontiers in payments systems
Alternative payment rails are helping central authority. Advantages of the ledger- drive efficiencies in the value exchange based record keeping include traceability, process security, controlled access, immutability Alternate payment protocols like bitcoin and indelibility. and the associated enabling blockchain technology are gaining traction over Alternate payment rails offer scope traditional transfer mechanisms for their for streamlining existing legacy intra- ability to radically streamline the process. institutional systems and bring in Blockchain is a digital public ledger or a significant benefits for individual customers database, where transactions are verified and businesses. Some of the key benefits and securely stored on a network of of alternate payment rails over traditional connected blocks without a governing systems are summarized below:
Advantages of alternate payment rails over traditional transfer mechanisms
Secured by Irreversibility Greater Low cost Fast settlement cryptographic of transactions traceability for (executed without of transactions protocols preventing fraud dispute resolution an intermediary)
Alternate payment rails are expected to 22 radically transform the payments processes . Banco Santander is experimenting with blockchain and digital currencies; has identified 20-25 use-cases for following: . It is reportedly talking to several banks to explore a collaboration on building blockchain enabled payment •• Domestic and international direct infrastructure for international payments remittance
•• Internal payments settlements . Australian Stock Exchange (ASX)23 is implementing blockchain technology for post trade settlement process •• Clearing and settlement of securities . ASX is expecting significant benefits such as reduction in administration and compliance costs, real time settlements •• Exchange of low liquidity assets and elimination of post trade settlement barriers
The differentiated user experience (for corporates and end users) achieved by deploying alternative payment rail technologies are:
•• Availability of high quality data, which is timely, accurate, transparent, consistent and immutable
•• Faster transactions and lower costs due to the elimination of an intermediary
•• Greater data security from malicious attacks, since data is stored in the form of records
19 Understanding the emerging frontiers in payments systems
Implications for the financial services will redefine rules for the winner in the players marketplace. To remain competitive, Digital technologies are going to evolve financial services players’ especially over time and will continue to disrupt incumbent ones must carefully look at the traditional ways of financial services their existing business and operating model business viz. service delivery, payments, and ensure that they are well positioned infrastructure etc. Emergence of digital to identify and execute winning strategies. wallets, alternate payment rails, and The pillars of the successful business and contactless payments through NFS etc. is operating model to win in the ‘digital’ world only the beginning of this. Every innovation are:
Customer centric product design Keep the customer at the center and innovate based on customer needs rather than based on technology or processes capabilities. Ensure that sufficient time is given for surveys or market research to identify key customer requirements. Engage customers periodically to identify improvements that a product requires. Focus not only what customers 1 explicitly want but also on ‘untold’ needs of the customers. Organization re-design to develop and align teams to focus on a ‘digital’ agenda Organizations promoting innovation or digital agenda need to ensure that organization culture and design supports the agenda. They should encourage collaboration across teams (e.g. product, technology, business) to drive digital agenda. Cross functional crack teams to conceptualize and execute digital projects can be formed. Further, performance of such teams can be evaluated based on success/failure of the project to bring in ownership and accountability. Employees need to be encouraged to experiment and should be helped to learn from failures. This will help organizations to develop a culture of continues innovation which is critical 2 to success of the innovation or digital agenda. Agile and faster technology development Legacy and disparate systems create the biggest roadblocks in efforts to provide innovative and digital solutions. Financial services players should focus on creating service oriented architecture to support multichannel service delivery. Technology innovation projects should be treated as ‘critical’ with clear measurement of turn-around times from conceptualization to delivery. Incumbent financial services organizations need to ‘think and execute like start-ups’ when it comes to innovation projects which brings in agile and faster approach to technology development. In addition, incumbent players can consider partnering with 3 or investing in technology companies to ‘buy’ the capabilities. Rapid payment technology advances will even out in the long run across economies, resulting in regulatory alignment and easier international commerce. Financial service providers wishing to remain sustainably profitable will have to re-think business and operating models, delivery channels, partnership alliances and technology components to remain relevant in the evolving digital financial services eco-space. In the absence of this, market disruptors of today will eventually be market leaders in the times to come.
20 Understanding the emerging frontiers in payments systems
Building customer trust in mobile payments through improved authentication and verification process
India Mobile Penetration Growth in mobile subscribers (in millions) India has more than a billion mobile 1286 1299 subscribers24, world’s second largest after 1229 1112 998 China, and currently has 225 million smart 986 944 859 894 865 886 phone users, ranking third after China and 747 752 641 the United States. Internet penetration is 525 397 347 311 356 set to reach 50% by 2018, up from 26% 261 274 285 297 305 in 2015. The Indian internet economy is expected to reach USD 200 billion by 202025. This offers a huge opportunity for 2008 2009 2010 2011 2012 2013 2014 2015 growth in mobile based financial services, India China USA broadly termed as m-wallets, m-banking Source: World Bank Data, Deloitte analysis and m-payments.
India Mobile Payments The Indian mobile payment market is succeed in India the way they have in other In developed economies across the world, expected to grow to USD 1.15 billion worth emerging markets, like Kenya, where nearly cash transactions have been on the decline of mobile payments in 201629 with more 50% of the population has signed up for for several years. Globally, volume of non- than 200 million registered mobile wallets. Vodafone’s M-pesa payment platform; or cash transactions was nearly 335 billion in In spite of these numbers, cash still remains Pakistan, where Telenor and Tameer Bank’s 2012. In the same year, India had just 6 non- the predominant payment mode in India. At Easypaisa platform, which began in 2008, cash transactions per citizen26. The global 12.4% of GDP, the value of banknotes and has 13 million users, as compared to banks, number is largely driven by developed coins in circulation is high when compared which reach out to just over 28 million economies – Finland, for instance, recorded to other emerging markets, like Brazil (4.1%) customers31? 451 non-cash transactions per citizen in and Mexico (5.7%)30. Mobile technology 201327. However, even poor / emerging has boomed in India the last decade, and economies like Somaliland and Kenya have there are nearly 80 mobile connections adopted non-cash payment mechanisms per 100 citizens. The question, therefore, rapidly.28 is - can mobile based financial services
21 Understanding the emerging frontiers in payments systems
Mobile Payments - Convenience and Security Mobile banking transaction for 2015 Banking services available on mobile 600 devices are fairly limited – looking at the 500 numbers, there is tremendous potential for growth. India recorded over 49 crore 400 mobile banking transactions in December 300 2015, a month on month increase of 200 nearly 46%32. To achieve this, it is not Value in in Value billions only important to provide innovative in Volume millions 100 products on mobile platforms but also 0 offer convenience and security to the end July May June consumer. The most common reason , April March August January October for not using phone to make a payment is February December November inadequate security. An appropriate level of September security needs to be provided in repeated Volume (Actual) Value (In Rs'000) and regular usage with a zero-fail rate, a necessary customer confidence build Source: RBI, Deloitte analysis measure. Growing trend of cyber frauds, India The electronic payments domain is marked 160,000 by significant risk of fraud with sensitive financial data being ferried across the world 140,000 multiple times a day. India has also seen 120,000 a rapidly growing trend of cyber fraud in 100,000 the recent past33 . Some notable methods 80,000 of fraud are (1) site replication, in which a 60,000 fraudulent website is used to obtain critical information from a user which is then used 40,000 to the scammer’s advantage; (2) credit card 20,000 charge back, in which a customer makes 0 an online purchase with their credit card 2011 2012 2013 2014 and the requests a chargeback from the credit card company, thereby canceling the Cyber fraud crimes transaction, is often used by scammers to purchase goods and have the transaction Source: The economic times, Deloitte analysis reversed; (3) phishing, which is similar to a fake website in that it tricks users into giving is increasingly getting difficult in an age of away critical information, which can be later rapid and constant change. Hundreds of misused; (4) malware insertion, in which a mobile change events like device upgrades, user is tricked into installing an app which new passwords, and stolen phones can can read information like credit card details, obfuscate consumer identity, requiring during transactions being conducted via a additional authentication measures. mobile phone; and (5) account take over, in Additionally, since some platforms, like which a scammer gains access to a victim’s Android, allow the user to run third party bank or credit card account and then applications from external sources, misuses it. Lack of strong authentication like the Google Play store, it becomes and verification process is one of the difficult to control the spread of malicious reasons for increase in risk of fraud. applications. Malware on mobile phones is, Authenticating a consumer’s mobile identity therefore, particularly dangerous.
22 Understanding the emerging frontiers in payments systems
Existing scenario in India Options for strong user authentication In India, the feasibility of using Aadhaar According to RBI regulations, two-factor There are three ways in which a transaction as a biometric authentication tool for all authentication is mandatory for all mobile can be authenticated, by verifying: payment transaction as a second factor payments excluding payments below INR authentication could be looked at. Indeed, •• Something that you are (e.g. fingerprint) 2,000 for contact less cards. This is the biometric authentication devices can reason why one-time passwords sent via •• Something that you know (e.g. password) capture a customer’s data at the point of SMS or verified by Visa/MasterCard secure sale and compare it with the data stored •• Something that you have ( e.g. SIM Card) code passwords are required to authorize in the Central Identities Data Repository to payments. However this method of two verify the identity of the customer. This is a For strong authentication, an innovative factor transaction isn’t fool proof. Along significantly simpler process for the poor, mix of the above three ways should be with serious security concerns it is very illiterate masses who would find it difficult used. Several PC-based methods that inconvenient for small transactions. to cope with multiple passwords and are commonly used in B2C applications, the complicated technology associated like secret questions, long passwords are The Prognosis with credit cards. However, this would somewhat unsecure when used on mobile require image processing technology to Most common ways in which mobile devices. Mobile devices have advantage of be made available at the point of sale, to payment fraud attacks have been reported improved human interfaces which can be avoid transmitting images over low speed are: used by enterprises so that users can be connections. •• Theft of user credentials used to access strongly authenticated. mobile applications and then criminal use The figure below shows percentage of of those credentials to hijack customer 1. Biometric authentication retail banking customers who consider accounts. Mobile devices provide rich opportunities the bank safe and secure when using to engage in biometric authentication biometrics. While significant percentages •• Hijacking and diverting of SMS messages because they have built-in features that of customers see the potential benefits of sent to user mobile devices for user enable biometric capture- microphone biometric solutions, many remain skeptical authentication or verification of for voice, camera for retina or fingerprint or concerned. transactions initiated on PCs. capture. This kind of authentication has an advantage over traditional passwords Constant innovations by hackers have or secret questions which are insufficient also forced mobile payment providers for personal identity simply because to innovate. These innovations can be they provide evidence of ownership of grouped into three broad categories: knowledge whereas biometrics provide •• Mobile app security: Methods to secure information regarding who the user is the apps against exploitation. rather than what he knows. In contrast with passwords and PINs, a biometric identifier •• Mobile environment security: Defences cannot be lost, forgotten or shared. that address weaknesses in mobile Another type of biometric authentication platforms is behavioural authentication: it is invisible •• Mobile-friendly user authentication: to the user and measures and records Improvements in human interactions the user’s keystroke and typing rhythms, on mobile devices so that users can be screen interface movements, e.g. how a strongly authenticated user enlarges images on a smartphone, and effectively creates a bio print for It is important for an enterprise to prioritize that user. This bio print can be used to at least one the above mentioned ways in authenticate the user during repeated log- order to gain consumer trust. ins to a service.
23 Understanding the emerging frontiers in payments systems
% of respondents transaction process is essentially useless to a scammer. 70% Tokenization has emerged as one of the 60% 50% most important solutions for enabling 40% secure cloud based payments. In March 30% 2016, ICICI bank became the first in India 20% to launch Host Card Emulation (HCE) 10% based mobile payments at any contactless 0% enabled terminal using its pocket app. UK
UAE This service makes use of tokenization USA India Brazil China France Poland and could be adopted by other vendors Canada Australia for secured online payments. Apple Pay, Bank owned biometric solution Third Party biometric solution Apple Inc.’s mobile payment system, uses tokenization as well. Note: This represents the percentage of respondents with top two ratings (6 or 7 on a scale from 1 to 7, where 1 means not at all safe and secure; 7 means extremely safe and secure).34 Tokenization has some advantages such as no impact on physical retail NFC terminal, no requirement for merchants to invest in •• Samsung’s Iris Authentication new hardware or software, and little impact Some of the recently introduced biometric Samsung recently launched Galaxy Tab on issuer’s existing back-end technology. In authentication techniques in the domain of Iris featuring iris-recognition technology addition to this, tokenization complements mobile payments are: that is ready for Aadhaar authentication the EMV (Europay, MasterCard and through an integrated and highly secure •• Alipay’s “Smile To Pay” Visa) standard mandated by the RBI, biometric device. The Galaxy Tab Iris will Alibaba is currently working on this new further strengthening the security of provide cashless and paperless services technology of biometric recognition that all transactions. EMV standards ensure in various applications such as banking, will allow users to make mobile payments chip-based payment cards and terminals e-Governance services such as passport, by simply scanning their faces. Although are compatible around the world rather taxation, healthcare and education. currently in test-mode, the start-up behind than only magnetic strips cards. Tokenized The capability of the Galaxy Tab Iris is the facial recognition technology that payments complement EMV, which has to function as an authentication device would power the service has already raised been successful at reducing fraud at enabling banks and financial institutions $47 million. the point-of-sale. Tokenisation has the to easily authenticate an individual’s data potential for reducing fraud from card not •• MasterCard’s Facial Scanning for account integration with their Aadhaar present transaction. Offering both EMV and This program which recently ran a numbers as well as provide an additional tokenization enhances the overall payment successful pilot in the US lets users layer of security for banking services such data security. confirm an online payment by holding up as locker access, fixed deposits, where a smartphone's camera to their face and authentication is required 3. Mobile device combined with user blinking to ensure the program isn't being attributes for stronger authentication duped by a still photograph. The process 2. Tokenization In this category, mobile device information would take place within MasterCard's own Tokenization replaces valuable information, is combined with user attributes to enable Identity Check app. The results of the pilot such as credit card details or PAN details stronger user authentication. It is a form of run were: with a random string which may resemble multi-form authentication. The information ––Participants found that biometric the original information in structure, but that can be combined includes, but is not authentication was overwhelmingly otherwise bears no similarity. There’s limited to the following: easy to use on its own (88%) and a no way for a scammer to “decrypt” this clear majority found it even easier than information to get the original details. password-based authentication (86%). The token can be matched to the original Mobile device information: ––Speaking of its convenience and ease of information only for the duration of the •• The mobile device itself, as known from use, more than 90% of participants said transaction, and only at the originator’s its hardware-resident or subscriber that biometric payment authentication database, where details are encrypted identifiers (for example, International is something they could see themselves and stored securely. Thus, these details Mobile Station Equipment Identity, MAC using on a daily basis. always reside in a secure location, while address, International Mobile Subscriber the information that travels through the Identity and SIM card)
24 Understanding the emerging frontiers in payments systems
•• The mobile phone number and its status authentication details can easily be used reduces chances of a security breach since to carry out spurious transactions without these tokens can’t be traced back to the •• The carrier network any detection – unless the victim herself original information by scammers. •• The mobile device's location finds out and notifies her bank. As detailed earlier, there are many types of Conclusion User attributes security breaches, most of which involve India is witnessing exponential growth in a scammer impersonating another user •• A biometric factor belonging to the user, digital payments. The macro-economic by stealing critical information through such as voice, iris scan or fingerprint factors prevailing in the country hold various means: site replication, phishing, captured through the mobile device huge potential of accelerating this growth malware insertion, etc. Even data theft microphone or camera further; these include pre-dominance of occurs because a scammer hacks into a working age population adaptable to newer •• A password entered by the user secure database – which means that for technology, and unprecedented growth the database the scammer is a legitimate •• Financial transaction information in smartphone and internet penetration. user. associated with the device and its owner, Furthermore, flagship government as recorded from past interactions initiatives like ‘Digital India’ are expected While no mode of authentication can to act as key catalysts and enablers in this completely address such security Authentication and the transaction transformation. However, security related breaches, the methods outlined earlier process flow issues have the potential to severely can definitely reduce the probability While a cash transaction involves undermine public confidence in the use of a breach. Biometric authentication immediate exchange of money between of electronic payments, which will in turn uses information which is unique to the customer and the merchant, mobile adversely impact their usage. Therefore, it an individual, such as fingerprints or payments are more complicated, since is imperative that payment products are iris patterns. This information can be the actual exchange of money happens not only customer-friendly but also assure replicated with great difficulty. A stolen between the customer’s bank and the a high level of security to prevent any fraud. credit card may be used to make payments merchant’s bank. Thus, banks need to New and innovative ways of authentication at a store. However, if the store requires validate the transaction before processing should be developed and adopted equally a customer to scan her fingerprint, them, which is where authentication amongst all m-payment providers. following which it directs the information comes in. Addressing security concerns around to the bank which authenticates it against payment system isn’t a work of a single the customer’s Aadhar information, the A typical non-cash payment process is stakeholder; broad-based collaboration will chances of a security breach reduce to shown below: be essential between banks and third party almost zero, since a criminal can’t replicate mobile payment providers to avoid the In the process shown below, the someone else’s fingerprints – if he can, reoccurrence of episodes. authentication details are how a bank there’s a much bigger crime to solve. identifies the customer and ultimately Similarly, tokenization simply creates a processes the payment. If a customer random data array to replace a vital piece is unable to provide the correct of information. This information can authentication details, the bank declines only be matched to the original piece of the payment and the transaction fails. information by a payment processor, which The entire process is automated and is at a highly secure location. This also depends on authentication. Thus, stolen
How the customer authentication takes place
Customer initiates payment at a platform provided by the Merchant’s bank receives Merchant’s bank routes Customer’s bank validates merchant, say a Point of Sale terminal or the merchant’s transaction information from information to customer’s transaction on the basis of website; provides authentication merchant bank through payment authentication provided by platform customer
Merchant receives notification about payment receipt from Merchant’s bank receives Payment platform transfers Customer’s bank initiates customer and completes the transaction; customer receives confirmation of payment payment to merchant’s bank payment to merchant’s bank notification from his bank about transfer of money from platform (possibly after deducting a through payment platform fee)
25 Understanding the emerging frontiers in payments systems
Endnotes
1. RBI Website, Newspaper articles 17. Mobile payments: What does 2016 have in store? Retaildive, 21 January 2016 2. RBI Website 18. ICICI Bank launches contactless mobile payment solution, 3. 20 PSU banks’ loss stand at Rs 16,272 cr in Q4, should you Businessline, 15 March 2016 invest in them? ; Financial Express, May 23, 2016 19. Pay with e-wallets at physical stores too, Livemint, 03 November 2015 4. Banks Board Bureau chief says it’s time for public sector bank mergers, livemint, 15th June, 2016 20. M-Pesa And The Rise of The Global Mobile Money Market, Forbes, 12 August 2015 5. NPCI Website 21. Paytm partners with insurance companies for making 6. Payments Bank: Telenor, IDFC, Dilip Shanghvi's Sun Pharma cashless payments, The Economic Times, to withdraw their licence, DNA, 20 May 2016, Tech Mahindra 29 October 2015; India Post Payments Bank receives 40 becomes the 3rd player to nix payments bank plans, Business partnership proposals for new venture, Business Standard, 09 Standard, May 24, 2016, Cholamandalam drops payments January 2016 bank plans, Business Standard, March 24, 2016 22. Santander has '20 to 25 uses' for the technology behind 7. Company Website bitcoin, Business Insider, 17 June 2015
8. FIS Website 23. ASX to test blockchain for trade settlement, Financial Times, 9. Company Websites, Bharti teams up with Kotak for payment 22 January 2016 bank, Business Standard, Jan 30, 2015, Aditya Birla Nuvo, Idea 24. Source: World Bank; Deloitte analysis Cellular to jointly set up payments bank. Livemint, Feb 19, 2016 25. 25 IAMAI Annual Report, 2015
10. Statista.com 26. 26 Payment Systems in India: Vision 2012-15, Reserve Bank of India 11. From High-Friction to Frictionless Transactions: How Uber Has Changed Things, Connection Model, and 11 November 27. World Payments Report, 2015 2015 28. GSMA: Mobile money for the unbanked, 2013 12. Flipkart Ping wants to make mobile shopping a more social 29. M-payment industry in India to touch USD 1.15 billion by 2016; experience, Indian Express, 25 August 2015 Business Standard, Dec 2012 13. 20 Top Mobile Banking Apps, the Financial Brand, 02 June 30. Cash Outlook, India; IBGC Working Paper, September 2013 2014 31. MobileWorld article, 2015; International Finance Corporation, 14. ICICI Bank’s ‘iMobile’ app gets an upgrade, Business Line, 08 Easypaisa case study 2105 June 2016 32. Source: RBI, Deloitte analysis 15. Walmart launching mobile payments in stores, USA today, 10 December 2015 33. Source: The Economic Times, Deloitte analysis
16. Paytm aims to sign up 4m stores in India for mobile payments, 34. wSource: Gartner, 2016 NFC World, 14 March 2016
26 Understanding the emerging frontiers in payments systems
Contacts
Kalpesh J. Mehta Partner Country Leader, Financial Services +91 98216 19013 [email protected]
Monish Shah Partner Consulting Leader, Financial Services +91 98200 85827 [email protected]
Vijay Mani Partner Payments, Financial Services +91 9619525854 [email protected]
The following Deloitte professionals were involved in preparing the report: Nachiket Limaye, Rachit Mathur, Meenakshi Khurana, Vaibhav Anand, Sidharth Ravishankar, Narendra Verma and Bharat Jakati
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