#payments insights. opinions.
Volume 17
Payments innovation supercharges FinTech adoption
Driven by vertiginous One in three digitally active individuals globally are now regular users of mobile and online FinTech according to the EY FinTech Adoption Index 2017. We now define » 1 this as an “early majority” and in our thinking about the future of the penetration rates that sector, FinTech in the mainstream is no longer a speculative scenario. In are redefining the “normal” fact, the figures show a doubling of adoption in the past 18 months; curve of technology moreover, the countries and segments that were leading the pack in our adoption, markets such 2015 study have only accelerated. as India and China are Undoubtedly, the service that supports the fastest rate of adoption is at the forefront of FinTech money transfer and payments, with our detailed survey of more than adoption. 22,000 people in 20 markets showing that half of those surveyed use these services and 88% anticipate doing so in the future. Continued on page 3
1 Everett M. Rogers, Diffusion of Innovations (Free Press, 5th edition, 2003). Editorial
Payments innovation 3 supercharges FinTech adoption Payments-related innovation is driving FinTech towards mainstream adoption — with China at the forefront.
Will biometrics finally replace 6 passwords? Biometric authentication is becoming mainstream for mobile devices — we analyze its future potential for the world of payments. Dear readers,
As an American payments professional, one of my favorite Considerations for a real-time 10 payments strategy questions about the US payment system is, “Why doesn’t the US Real-time payments: the need for payment system behave like all the others?” This question is a holistic strategy. instructive because it highlights how fundamentally localized payment system innovations can be, even in a global economy. Today, as the payments world faces global trends, including real- time payments, new business models and new technologies, it is Understanding Open Banking 12 Hamish Thomas, EY EMEIA Payments more important than ever to combine analysis of global trends Leader, provides us with his insights with “on the ground” knowledge of national and regional payment into what Payment Services Directive infrastructure. This edition of our #payments quarterly provides 2 (PSD2) and Open Banking means for financial services providers and insights from around the world about payments transformation consumers. initiatives. We at EY welcome the global dialogue these articles will generate. Ultimately, it is the combination of global insight M&A roundup 16 Deal activity in the payment industry and localized implementation that will help EY and our clients slowed down in the second quarter develop practical payment services that work in local markets. of 2017, following a positive start in the first quarter. Best,
Venture Capital roundup 18 Q2 2017 saw a 10% increase in the number of deals, with more than half Margaret Weichert of them around payment acceptance Head of Payments, EY Americas and alternative payment systems.
Transaction overview 21 M&A and Venture Capital Payments innovation supercharges FinTech adoption Continued from page 1
As China continues to demonstrate its The rise of the digital native the industry, itself showing an increase position as global leader in consumer FinTech In the EY FinTech Adoption Index 2017, we from 18% to 50%. There was also a innovation and adoption, it is perhaps no evaluated five broad vertical sectors under significant rise in the adoption of insurance surprise that payments innovation is at the the FinTech stable: money transfer and services as another fast-developing sector. forefront. Supported by a huge consumer payments, financial planning, savings and base and well-developed e-commerce investments, borrowing, and insurance. At this point of industry maturity, there is capabilities, the total volume of China’s a clear driver in terms of sector; however, mobile payments via non-traditional Comparing the studies from 2015 to 2017, the study also revealed a clear picture platforms, primarily Alipay and Tenpay, hit it is money transfer and payments that of those digitally active users embracing US$8.6 trillion in 2016.2 remains the most adopted segment within FinTech. Adoption has been faster
Figure 1: Comparison of FinTech categories ranked by adoption rate in 2015 and 2017
2015 2017
1 Money transfer and payments: 18% 1 Money transfer and payments: 50%
2 Savings and investments: 17% 2 Insurance: 24%
3 Financial planning: 8% 3 Savings and investments: 20%
4 Insurance: 8% 4 Financial planning: 10%
5 Borrowing: 6% 5 Borrowing: 10%
Note: The figures show the average percentage of respondents who reported using one or more FinTech services in that category. among the under-45s globally who are don’t have particularly strong relationships What is driving the importance of payments- increasingly looking to manage as much with incumbent financial service providers, related solutions, and why is this sector of their life as possible online, becoming creating opportunities beyond the making such advances at this point of digitally native. Moreover, individuals traditional players. industry development? in emerging markets are leading the adoption charge. Driven by vertiginous The Payments play First and foremost, the sheer scale of mobile and online penetration rates It is no coincidence that the top five unmet needs provides considerable that are redefining the “normal” curve countries for overall adoption of FinTech opportunity for non-traditional players. of technology adoption, markets such (namely, China, India, UK, Brazil and In many developing markets, a large as India and China are at the forefront of Australia) are also the top five for money proportion of consumers and small and FinTech adoption. A common connection transfer and payments, emphasizing the medium entities (SMEs) have been between these adopters is that they often importance of this sector. historically underserved when it comes to payments and related products;
2 www.iresearchchina.com (accessed on 14 July 2017)
Payments Volume 17 3 How hands-on a person is with managing FinTech adoption their overall finances is a personal choice, Payments driving FinTech but payments are an inescapable daily adoption necessity.
Figure 2: Comparison of the top five markets with the highest FinTech adaption for each FinTech category
Money transfer Financial Savings and Borrowing Insurance and payments planning investments
1 China 83% China 22% China 58% China 46% India 47%
2 India 72% Brazil 21% India 39% India 20% UK 43%
3 Brazil 60% India 20% Brazil 29% Brazil 15% China 38%
4 Australia 59% US 15% US 27% US 13% South Africa 32%
5 UK 57% Hong Kong SAR 13% Hong Kong SAR 25% Germany 12% Germany 31%
Note: The figures show the average percentage of respondents in each market who reported using one or more FinTech service in that catecory. the “white space” opportunity is immense. Asia-Pacific FinTech Leader at EY, has at the nexus of a whole range of financial Related to this, facilitative government suggested, “How hands-on a person and non-financial services — using this to and regulatory supports have clearly played is with managing their overall finances is connect to many areas of users’ lifestyles. a role. In traditionally cash-dominated a personal choice, but payments are an markets, for example, initiatives such as inescapable daily necessity.” China rising demonetization in India and support for As previously noted, emerging markets are third-party payment providers in China have In addition, payments is often a more generally ahead of the curve in FinTech helped drive the ever-increasing penetration accessible market for new entrants than adoption. There are many reasons for this of e-money. In many instances, such some of the other sectors in financial — not least of which is the scale of unmet markets are bypassing (or “leapfrogging”) services — in terms of regulatory compliance needs and opportunity for technology developed market payment mechanisms, and other potential barriers to entry. This leapfrog. Facilitative regulation can also such as credit and debit cards, and moving provides a more fertile ground for new play a key role. straight to new forms of digital payments FinTech firms, as well as a growing secondary and stored value solutions. As Eric Jing, market where the business model of firms is In China, a generally permissive regulatory CEO of Ant Financial (operator of Alipay), to consolidate the services of other FinTech approach has enabled non-traditional details in our report, more than 60% of (including payment) providers. players (the largest of which had existing Ant Credit Pay (or Huabei) users do not and sector-leading technology businesses) own a traditional credit card.3 This is but Traditional and non-traditional players to innovate across the spectrum of financial one example of the rise of non-traditional increasingly view payments as a platform — services products. As we wrote in a 2016 payments. a base upon which to build additional report on China FinTech: “While London, financial and non-financial services. One of New York and Silicon Valley compete to Another reason is that making and the most successful examples of this has position themselves as the world’s ‘FinTech receiving payments is the area of financial been China’s Ant Financial (a case study in hub,’ China has leapfrogged ahead to services that consumers have the most our EY FinTech Adoption Index 2017), become the undoubted center of global ongoing interaction with. As James Lloyd, where the Alipay payment functionality lies FinTech innovation and adoption.”4
3 EY FinTech Adoption Index 2017 4 The Rise of FinTech in China Redefining Financial Services, A Collaborative Report by DBS and EY, November 2016
Payments Volume 17 4 Money transfer and payments are proving to FinTech adoption be a bedrock for development of other Payments driving FinTech bundled services, and are adding value to the adoption ecosystem and driving sustainable growth.
Whereas firms in developed markets provider. Starting as Alipay, a payment more than two billion people in 10 years. strive to make incremental steps in line mechanism for shoppers ordering Ant Financial is building an open ecosystem, with environmental (and competitive) online, Ant Financial has since grown to enabling traditional financial institutions constraints, those in China have generally encompass a whole range of financial to provide services in a more efficient way.” had a clearer run. and non-financial services — all building on Alipay’s capabilities and user base. China still has a long way to go. While the That China is the global leader in consumer As a result, Alipay is one of the leading number and penetration of FinTech-enabled FinTech adoption is now beyond doubt. EY payments services in the world — payment services continues to rise, the FinTech Adoption Index 2017 demonstrates enabling groundbreaking numbers of success of the vertical also highlights the that the country has reached the “mass transactions. During a 24-hour period potential of the other financial sectors — adoption” stage, with overall adoption at within the 2016 Global Shopping Festival including insurance and wealth and asset 69%, driven by an accommodative alone, Alipay processed 1.05 billion management. Against a general slow-down regulatory position, more smartphone users transactions. in FinTech investment in Europe and the than anywhere else and the emergence of US, China FinTech investment reached native technology giants, such as Baidu, Eric Jing, CEO of Ant Financial, comments new highs in 2016, with VC-backed FinTech Tencent and Alibaba. FinTech adoption in in our report about how his firm is taking companies in China seeing both deals and China is already embedded as a cultural a wide view on its role in the development dollars reach a five-year high with US$4.6 norm, suggesting that it will only continue. of financial services that is indicative of billion raised across 46 deals.5 This trend the forward-thinking prevalent among the is backed by the country’s wealth of talent Ant Financial is the financial affiliate of participants in the country: “We aim to with an estimated 7.6 million financial Alibaba Group, China’s largest e-commerce bring equal access in financial services to services professionals.6
Eric Jing, CEO Ant Financial originated from Alipay, one of the world’s largest payment platforms. We believe in the power of tech and, by using it well, we can bring the world equal opportunities — for those underserved or unserved by traditional financial services. By working closely with our financial and strategic partners around the world, we aim to bring equal access in financial services to more than two billion people in 10 years. Ant Financial Ant Financial is building an open ecosystem, enabling traditional financial institutions Year launched: 2014 to provide services in a more efficient way. We believe financial services should be Geographical presence: simple, low cost and accessible; our technologies, such as cloud computing and big data Headquarter in China; services analytics, make us uniquely placed to achieve this. offered globally We leverage our technological capabilities to provide underserved or unserved small Current traction: and micro businesses and individual consumers with a wide range of financial services, 670 million total users globally, including payments, micro loans, insurance and credit assessment services. More than including 450 million Alipay 200 million Alipay users have signed up for Sesame Credit, a credit scoring service users, 300 million Yu’e Bao users that provides high-scoring users with conveniences, such as deposit-free bicycle and and 200 million Sesame Credit car rentals, and card-free hotel check-in. More than 60% of Ant Credit Pay (or Huabei) users users do not own a traditional credit card. On the payments front, Alipay enables groundbreaking numbers of transactions through technology. During the 2016 Global Shopping Festival, China’s equivalent of Cyber Monday, Alipay processed 1.05 billion transactions in 24 hours, reaching up to 120,000 transactions per second. Ant Financial is not only looking at the Chinese mainland market; we also want to share our tech know-how with our global partners in countries such as India, Thailand, Korea, the Philippines and Indonesia. We are currently providing services to more than 670 million users around the world.
5 www.cbinsights.com/research-webinar-fintech-2016 6 China and UK FinTech — Unlocking opportunity, EY + HM Government
Payments Volume 17 5 Financial services ”rebundling” to more FinTech adoption astute digital natives is a global trend that Payments driving FinTech is set to continue. adoption
Figure 3: Comparison of current and anticipated future use of FinTech, by FinTech category
2017 use Future use
65
50 39 33 24 18 20 20 10 10
Money transfer Financial planning Savings and investments Borrowing Insurance and payments
Notes: The future use data in this chart has been updated from the first edition of our report. In this updated version, the chart shows the average future anitcipated use of at least one FinTech service in each category by all respondents. The first edition of our report showed future anitcipated use by current users of one or more FinTech service, which was as follows: Money transfer and payments — 88%; Financial planning — 22%; Savings and investments — 42%; Borrowing — 26%; Insurance — 55%.
The new financial services paradigm The rise of FinTech isn’t entirely a story and are increasingly impactful. The The index shows that FinTech adoption is a of revolution or disruption — and the opportunity now is for incumbents, positive trend that will likely gather further increase in FinTech adoption isn’t solely investors, and policymakers to react momentum. Our analysis of future intended driven by startups (after all, Ant Financial’s to the ever-increasing pace of customer adoption suggests an overall increase to last equity fundraise was for a reported adoption. The future is not yet set. 52% globally. Payments is on the crest of US$4.5 billion). Existing incumbent or this wave and looks set to continue as a traditional financial services players have dominant driver; the characteristics that a hugely important role to play — whether have led it to its leading position are unlikely in partnering with FinTech firms (many to change. Money transfer and payments of who provide enabling technologies), are proving to be a bedrock for the providing the infrastructure upon which development of other bundled services, FinTech firms compete or learning from and are adding value to the ecosystem and the non-traditional would-be insurgents. driving sustainable growth. Above all, there is a significant opportunity in matching the distribution and data assets Jan Bellens As the industry matures, there are also of traditional players with the innovation more clearly defined ways in which FinTech and customer centricity of FinTech firms. companies can create success. With a laser focus on customer experience, they can Financial services “rebundling” to more revolutionize the economics of a market by astute digital natives is a global trend making services cheaper, creating new that is set to continue. The EY FinTech data-driven business models and working Adoption Index 2017 shows that FinTech with (or against) established firms to firms — especially those in the payments enhance (or dismantle) existing offerings. vertical —are moving in the right direction James Lloyd
Payments Volume 17 6 Will biometrics finally replace passwords?
In the science fiction blockbuster “Back to the Future Part II” from 1989, the two main characters travel forward in time to the year 2015. Here, it is not only possible to drive flying skateboards and wear self- lacing sneakers, but also to use fingerprints to authenticate payments at a device comparable to a tablet computer.
Nearly 30 years have passed since this fiction of using biometric factors for payment authorization, during which we have seen various initiatives in the field of biometric authentication by different (payment) players, e.g., banks, card schemes, point of sale (POS) terminal manufacturers, alternative payment methods or other technology providers. However, today, biometrics still play only a minor role, and authentication continues to be dominated by PIN codes, passwords and signatures. Against this backdrop, what will be the role for biometric authentication in the future world of payments? Figure 4: Examples of biometric factors 1. Biometric authentication Authentication can be defined as the Physical factors Behavioral factors process of confirming an identity claimed by an entity, Replace with “such as” being the true cardholder in the respective payment transaction. The authentication • Fingerprint • Keystroke dynamics can be performed by one or more of the • Facial features • Cursor movements following means: (iris, ear, mouth, etc.) • Handwriting patterns • Voice • Speaking patterns • Knowledge: something the user • Heartbeat • Finger movements knows (e.g., a PIN or password) • Veins • Eye movement • Ownership: something the user has (e.g., a card, token or mobile phone) • Inherence: something the user is (e.g., a biometric characteristic) are related to the pattern of behavior of the user, e.g., keystroke dynamics or cursor While payment transactions are normally movements. authenticated using the first two categories, the application of biometric factors out of One major difference between biometric the third category, “inherence”, has authentication technologies and other recently become more relevant. Biometric methods is that one has to incorporate factors include physical and behavioral probabilities in the authentication process: factors. Whereas physical factors are whereas a PIN or password can either be innate, such as fingerprints, iris patterns true or false, a biometric scanner (e.g., for a or other facial features, behavioral factors fingerprint) will usually return a probability
Payments Volume 17 7 Biometric authentication Biometric authentication supports a uniform user Will biometrics finally replace experience across channels. passwords?
that the authentication is a match. This means would require investment in of having a uniform user experience across poses challenges, especially for payment infrastructure — either at the merchant’s channels will promote the establishment transactions where authentication errors POS (e.g., installing a camera for face or of biometric authentication for payment lead to financial losses or chargeback iris recognition) or for the issued cards transactions in the coming years. processes. (e.g., by issuing cards with an embedded fingerprint scanner). We do not see a For this hypothesis, we have to 2. The future role of authentication reason for merchants or issuers justifying differentiate between POS and remote for payment transactions such investments as fraud is comparably payments. At the POS, we see mobile In order to assess the role biometric low and we do not expect any willingness payments finally gaining traction among authentication could have in the future on the part of consumers to pay for using consumers and thereby also promoting world of payments, we have developed biometric authentication. biometric authentication. Many existing different hypotheses that differentiate mobile devices are technically capable of between payment channels (POS vs. Hypothesis 2: The increasing prevalence analyzing biometric factors — for example, remote), payment instruments (card vs. and use of biometrics-enabled devices through cameras, fingerprint scanners or other) and market characteristics (e.g., smartphones) and the ultimate goal microphones for voice recognition. Biometric (traditional card-focused vs. developing). authentication is already being used for Figure 5: Penetration of smartphones with unlocking phones and computers or for Hypothesis 1: In traditionally card-based fingerprint sensors worldwide confirming actions. When conducting payment markets with established payment 67% payment transactions at the POS, biometric infrastructure, biometrics will play only factors can be used to supplement or a minor role in the authentication of card 55% replace other factors (e.g., PIN) without payments at the POS. extra cost, but with added convenience for consumers and merchants. Examples In our opinion, in markets with an 40% are ApplePay or SamsungPay, which are established, working card-based making use of fingerprints as a biometric infrastructure, there is simply no actual 29% authentication factor. customer need that would be solved by using biometric authentication: there 19% For remote payments there is a comparable is a learned and working process for development: more and more payment paying by card at the POS using PIN or transactions are conducted on biometric- signature as the authentication method. 2014 2015 2016 2017 2018 enabled devices (smartphones, tablets, A migration to biometric authentication Source: Credit Suisse (2016)/Statista (2017) laptops, etc.). Online merchants are
Payments Volume 17 8 Legal and regulatory initiatives Biometric authentication will promote the use of biometric Will biometrics finally replace authentication. passwords?
payments. However, for traditional card-focused payment markets, there is simply no urgent need to use biometric authentication. Therefore, in these markets, we expect the establishment of new authentication methods to be connected with the use of new payment instruments like the mobile phone.
Legal and regulatory initiatives will further promote the use of biometric authentication as an additional means to enhance the security of payment systems. For example, in Europe, there is a regulatory push towards strong customer authentication methods. Customer experience and convenience are key success factors at the POS as well as online. Therefore, we will most likely experience the use of a diverse set of constantly trying to optimize conversion US-based payment service Keyo uses palm authentication factors that are intelligently rates, or instance by selecting the most scanners or the service Smile To Pay by selected, depending on the risk of fraud convenient payment methods. When Ant Financial (Alipay) that uses cameras associated with specific transactions across integrated neatly, biometric authentication for facial recognition. Because of the channels. can further improve user experience in the significant investment required, we see check-out process — again, at no additional limited potential in developed payment cost. Many payment method providers markets; however, we expect selected are already trying to integrate biometrics markets to leapfrog card-based payments into their offering: for example, the Identity infrastructure and directly establish a Check Mobile by Mastercard, ApplePay payment system based on biometric (with its remote payment functionality) authentication methods. This is currently and start-ups like Dublin-based Touchtech. happening in India, where there has been a In the future, we expect a convergence major push by the government to use a of POS and remote payment methods, central biometric identity register (called Kai-Christian Claus intensifying the momentum described Aadhaar) for conducting payments. above to use biometric-enabled devices for Furthermore, we expect a growing number conducting payments. of use cases for biometric authentication in closed-loop systems, e.g., for events, Hypothesis 3: In the medium term, festivals, specific merchants or cafeterias. biometrics as a direct link-to-account will Mostly, these use cases require a separate be relevant for POS payments only in hardware infrastructure anyway, and a few selected markets with previously biometric authentication would be a means underdeveloped payment infrastructure to improve the customer experience. One Lucas Wirmer and in specific closed-loop use cases. example for this category is Liquid Pay in Japan. After having their fingerprints, Biometric features have not only the passport and credit card information potential to act as an authentication registered at their hotel, tourists can pay in factor, but also to provide a direct link participating stores using their fingerprint. to a payment account and thereby replace the card as a payment medium. 3. Conclusion and outlook This usually requires the installation of In conclusion, we can summarize that dedicated biometric payment hardware biometric authentication will have at the merchant. For example, the a significant role in the future world of Lars Putensen
Payments Volume 17 9 Considerations for a real-time payments (RTP) strategy
Driven by a range of market and initiative, they are not all addressing the integrate them into the overall technology government-driven initiatives, countries same use cases or strategic areas. In this road map for change? This paper discusses around the world have moved or are rapidly changing environment, US financial the key questions financial institutions moving to introduce faster payments institutions are asking: which market need to address when defining their RTP systems that can process both high-value solutions on faster payments are most strategy and the considerations for selecting and low-value transactions in near-real valuable, and what is the best way to a RTP solution or vendor. time. In the US, unlike in most other countries, the government is not driving Figure 6: Selected RTP initiatives by different US market players in relevance to financial institutions the move toward faster payments, creating a level of uncertainty about exactly how Market player Highlights faster payments will evolve in the American market. The Federal • Established Secure Payments Task Force Steering Committee, Reserve which is evaluating approaches for implementing RTP in the US The list of potential “faster” payment • Acting as an enabler and not a faster payments solution-provider options in the US is long and growing, including established organizations such NACHA • Launched Same Day ACH, introducing two same-day clearing as the Federal Reserve, the NACHA, The windows in September 2016; Same Day ACH debits to go into Clearing House (TCH), Visa, Mastercard effect in September 2017 and emerging market entrants, such as • Working on other ACH modernization efforts, such as business Zelle, Dwolla, and Ripple. NACHA made the to business (B2B) directory services, tokenization of the first step toward faster payments in the ACH network and application programming interface (API) US by launching two same-day Automated standardization Clearing House (ACH) clearing windows TCH • Designing and building a RTP solution that will facilitate real-time in September 2016. While different parties messaging (both for money movement and information), with are undertaking the faster payments near- to real-time settlement • Will support all major payment use cases, such B2B, business to customer (B2C), peer to peer (P2P) and customer to business (C2B) for credit push payments • Will provide options to use either TCH services (e.g., directory, tokenization and fraud) or leverage other third-party solutions • Working on pilot use cases with leading US financial institutions
Early Warning • Provides near-real-time payment solutions to financial institutions Services (EWS) as part of the Zelle offering using the clearXchange network • Leverages its network directory of registered banks to enable money movement using customer email or mobile phone • Supports P2P and also select B2C (e.g., disbursements) and C2B (e.g., consumer to Financial Institution (FI) bill pay) for credit push payments • Partnerships with providers like Fiserv and Fidelity National Information Service Inc (FIS) is helping to broaden the solution reach
Visa and • Provides solutions that leverage debit networks (Visa Direct Mastercard and Mastercard Send) to deliver funds in near-real-time to debit cards of participating FIs • Supports P2P and select B2C (e.g., disbursements) and C2B (e.g., credit card bill pay) for credit push and pull payments • Visa and Mastercard have different partnerships with providers like FIS, Hyperwallet, PayPal and Early Warning Services, helping them to broaden the solution reach
Payments Volume 17 10 The list of potential faster Real-time payments payment options in the US is Considerations for a real-time long and growing. payments strategy
Setting the agenda Defining the RTP strategy and implementation approach opens a host of questions for financial institutions, such as
• What are the lessons learned from prior • What is the impact of the existing RTP implementations around the world? technology landscape (from submission • What are the right offerings and pricing through middleware to system of for addressing customers’ needs? What records)? is the best way to address RTP use cases that will overlap with existing faster As financial institutions answer these and payments capabilities (e.g., wires)? other questions, they also need to evaluate • What are the technology and operations the solution options, the right partners and capabilities required to offer RTP vendor choices. solutions, and how will each impact both the core payment processing and supporting functions, such as finance, accounting, fraud, risk, controls and compliance?
Figure 7: Key questions that financial institutions need to consider to build the RTP strategy
• What are the lessons learned • What capabilities (process • What scalability, availability or performance from global intitatives? automation, core payments issues might be created? • What are the process, • What initiatives or standards are processing, finance/accounting, • What is required for tech ecosystem readiness policies, exception likely to succeed in the US? fraud, risk/controls, etc.) for transition to RTP? handling, risk and • How will these efforts ultimately are required to launch a RTP solution? • What are payment channel impacts and overlaps? compliance impacts? fit with the Fed’s faster payment • What are the gaps in the existing • How will new messaging and tokenization • What is required to framework? environment vs. leading practices? standards be impacted? allow 24/7 support?
Technology Plan Key enablement capabilities Organizational Success Market trends impact
• What are the key use cases for RTP in the Business case Implementation wholesale space? and product • Over time, how will approach strategy other businesses Market Risk and benefit? solutions controls
• What solutions are available in the market and how • How can the plan be structured today • What are the required changes to the control environment? effectively will they integrate with the TCH solution? to allow maneuverability tomorrow? • How do lines of defense change with new capabilities and solution • How well are these solutions positioned to meet my configuration? current and potential future business requirements? • Does the third-party vendor approach make sense?
Strategy Implementation
Payments Volume 17 11 Financial institutions should Real-time payments prioritize RTP in their payments Considerations for a real-time road map. payments strategy
Building a holistic approach However, a more holistic approach toward program that understands the market With changing customer expectations, it’s RTP will help support strategic choices dynamics, considers the organization’s becoming important for financial institutions that are not tied to a single industry utility, vision and can bring together the business, to prioritize RTP in the organization’s while also helping you leverage this technology, operations and support payments road map. Identifying a sample opportunity to advance broader payment functions to execute on the overall vision use case and building prototypes may initiatives. Thus, building the RTP strategy and plan. help launch a quick product in the market. and implementation plan requires a steering
Figure 8: Framework for a comprehensive RTP strategy 1Business strategy Technology delivery 2
Defining a customer centric business strategy requires Scaling the technology architecture requires alignment with alignment with market needs. the enterprise payments strategy.
• Assess current product and, services, • Design solution so it leverages and align RTP core competencies standards and is not tied to a with customer needs single industry utility • Identify pilot use cases, new products • Model changes to intraday and and strategic opportunities batch capacity requirements • Develop pricing and non-pricing • Standardize shared RT (value) strategies payments rails across bank — • Leverage opportunity to advance commercial and consumer broad payment initiatives • Share payments platform for (e.g., payment hub) Business Technology all RT payment methods and • Capture opportunity to strategy delivery types upgrade digital channels • Assess impact to high availability and desaster recovery strategies
Shifting from a batch Designing risk and control environment requires end- measures requires enhanced to-end processing alignment. Operations Regulatory, automation for RTP. • Design cross-channel alignment for readiness risk and • Design operational and technical consistency across customer resiliency for availability visibility and touch points controls • Put security controls in • Assess impact of 24/7 support place that scale to the threat • Assess impact to supplemental • Build and enhance real-time functions: marketing, liquidity, monitoring and alerting reconciliation accounting and capability (e.g., liquidity) finance • Consider regulatory inputs (e.g., • Embed flexibility to make changes anti-money laundring (AML), to business rules in real time Office of Foreign • Assess changes to good funds Assets Control (OFAC)) model
3 Operations readiness Regulatory, risk and controls 4
Payments Volume 17 12 Banks should mobilize today Real-time payments in a way that allows them to make Considerations for a real-time choices that fit tomorrow. payments strategy
Defining a framework for RTP vendor Figure 9: Key drivers for RTP solution and vendor selection selection Financial institutions need a well-defined Vendor Key questions framework to evaluate the solutions and selection vendors that will support and accelerate criteria their RTP road map. While many vendors offer similar features, each financial Cost • What are the license and transaction usage costs for the solution? institution needs to weigh several factors • What are the initial implementation and ongoing maintenance costs? when determining which solutions and • What payment modules are included in the cost, and what is the vendors best align with the organization’s flexibility in selecting the modules? objectives, customer needs and enterprise Time to market • Does the solution accelerate the time to market for the RTP solution? payments strategy. It is important that • Does the solution help launch a quick prototype of a select RTP financial institutions mobilize today in a use case? way that allows them to make choices that fit tomorrow. Technology • How open is the solution, and what is the support for APIs? blueprint • Is the solution decoupled, modular and micro-services-based? Figure 9 provides an initial framework for • Does the solution follow global messaging protocols suited for conducting an RTP vendor analysis and can RTP (e.g., ISO 20022)? be customized to fit specific organizational Functional • What capabilities are offered to connect the users (i.e., directory requirements. depth services)? • What are the core payment processing capabilities? • What are the reporting-, fraud- and risk-monitoring capabilities? • Can the solution integrate with all channels and provide capabilities, such as notifications or alerts?
Fit with overall • What are the deployment options (e.g., on-premise vs. hosted or payments and single or vs. multi-instance)? IT strategy • How does the solution fit into the broader payments strategy (e.g., payments hub, digital road map)? Margaret Weichert • What is the DevOps cycle and the release or deployment support provided by the vendor?
Maturity • Does the solution or vendor have experience in other faster payments markets (e.g., UK and Australia)? • Which other financial institutions are participating in the solution? Is the vendor working on pilots with some of the leading RTP schemes (e.g., TCH)?
Abhay Rathi
Payments Volume 17 13 Interview Understanding Open Banking
Since the UK’s Competition and Markets Authority (CMA) mandated the delivery of Open Banking, banks have initiated transformation programs to comply with the new regulation and re-assess the changing competitive landscape. New propositions are quickly being developed to take advantage of the new environment that will come into force in 2018 and will allow consumers to easily share their financial data with third parties. Banks are also navigating their way through a wider set of regulatory changes, some with overlapping (e.g. PSD2) or even parallel (e.g. General Data Protection Regulation (GDPR)) requirements.
While banks are working hard to understand the complex regulatory landscape and its strategic impact, consumers remain relatively uninformed about the impacts that Open Banking will have on their own choices and behavior. Hamish Thomas, EY EMEIA Payments Leader, spoke to Finextra (the leading independent newswire and information source for the worldwide financial technology community) about what consumers can expect from the introduction of Open Banking, and how banks and other payment services providers can encourage and drive adoption.
There’s clearly a lot going on across the set of regulations, such as structural perhaps be more opportunity to industry with PSD2, Open Banking and reform or ring fencing, and also regulation specifically choose which products and other regulatory initiatives. How does all in place to help with security, fraud and services from which providers we can this change fit together? financial crime. So, again, it’s important to bundle together, to give us the experience strike that balance between the innovation, and engagement with financial services Hamish: I think you’re right, there is a lot the competition and the access, that is that we’re seeking. I’d then add to that going on. I think it’s important to look at driving improved customer outcomes — but ”control”: control over our data and control that holistically in terms of how all those to balance that with the critical need over who accesses our data, control over things overlap. I think the most closely for stability and security of our financial how we engage with this breadth of new related are PSD2, GDPR and then from a services, and to manage the threat of providers. And then finally, I talk about UK perspective, the wider piece around fraud and financial crime. ”coverage.” When I talk about coverage, Open Banking. On the one hand, we have I mean those across segments of our PDS2 and Open Banking, which are What do open APIs mean for bank society who are not well served by financial setting a course for increased ability to consumers? services, or to some degree are excluded, share data — share our data — not just because of the products and services they with the institutions with whom we directly Hamish: If we look at open APIs need or can trust, or indeed other aspects, ban, but also third parties, to allow them specifically, to be honest, they don’t such as the sophistication of credit rating, to provide a wider range of products and mean an awful lot to consumers; they’re in terms of the offers that are made to services, and to initiate payments on our effectively a technical enabler. Perhaps certain members of our community. We behalf, with our permission. The counterpoint the interesting question is: what does Open therefore look at the potential of Open to that is GDPR, which is much more Banking mean to consumers? When we Banking to provide more specific products focused on data protection, data control, look at that — there are a number of ways and services to those segments who are permissions, and being clear on how data is to look at it — I like to summarize it across underserved, and to increase the coverage managed, stored and looked after. So, it’s four areas. Firstly, I would say ”choice”: across all participants in what can be important to strike that balance and look the potential for increase in choice in terms provided and how they consume it. at these holistically when delivering against of the products and services we have all of this regulation; so you have that access to, and also the providers who In summary, I would talk about choice, balance between the openness and sharing, deliver them for us. Related to that, we coverage, control and the customization and also the control and protection. have ”customization”: when we look at that the promise of Open Banking can Now, that is further complicated by a wider those products and services, there will bring.
Payments Volume 17 14 I would talk about choice, coverage, Interview control and the customization that the Hamish Thomas on promise of Open Banking can bring. Understanding Open Banking
What needs to be done to instil confidence in Open Banking adoption?
Hamish: Confidence in adoption comes from a number of areas. I think the most important would be trust; that is to say, the trust that we as consumers have in those institutions that are providing Open Banking services — that may be banks, other payment services providers, or third parties who might access our accounts and use our data on our behalf. We all need to trust the actions, the security and the stability of those services. Another dimension I would talk about would be awareness and education.
Some of the research we have done shows that the majority of consumers don’t really know what Open Banking is:
• What does it mean? • What potential does it bring? • What are the benefits it could have? • How are the risks around that being managed?
Therefore, there is a need for coherent and simple messaging across the industry to help people understand what this means and the potential it can bring.
Finally, I would talk about the propositions; the products and services. They need to be relevant to customers. They need to be useful. They need to be things that that trust, to provide that awareness and make our everyday lives and the way in education, and to maintain that relevance. which we consume and engage with I think in that way, we will be able to financial services easier, in terms of ease increase our confidence in the success of of access, ease of use, and the experience Open Banking. they provide. In summary, that would really be around the trust, the education and awareness, and the relevance of the products and services that all participants — both established and new — will bring into the market. Ultimately, what is really needed is the action of banks, other service providers, and all those involved in the Open Banking end-to-end service, to really put consumers and what they need into the heart of what they deliver to engender Hamish Thomas
Payments Volume 17 15 M&A roundup
M&A activity in the payments industry declined in the second quarter of 2017, Figure 12: Targets by segment (in percentage) following a surge in the first quarter of the year. In Q2 2017, a total of 37 deals were reported with a total disclosed value of US$4 billion. The acquisition 2017 2 of CardConnect by First Data stands out, since it involves a leading integrated 1 26 1 merchant acquiring payment gateway and security solution as well as the 2017 second largest US merchant acquirer.7 5
3 5 M&A activity and deal characteristics platform and gateway along with PCI- 1 A total of 37 M&A transactions were certified (Payment Card Industry Data announced in the second quarter (Q2) of Security Standard) point-to-point 1 2017. This represents a decrease of 47%, encryption and tokenization solutions relative to the 70 deals in Q2 2016. After that can integrate with leading enterprise an increase in the number of deals in Q1 resource planning (ERP) software, such Payment acceptance Money transfer devices and software Acquiring 9 2017, driven by the recovery of deal activity as Oracle and SAP. First Data’s definitive Processing Data analytics in Europe and North America, and the surge merger agreement, submitted on 26 May Issuing Couponing or loyalty in Asia, Q2 has seen a decline due to a 2017, offered to acquire CardConnect Alternative payment Others include security, systems ATM and commerce fall-back in Asia and limited activity in the for US$769 million, valuing the company rest of the world (excluding Europe and at an implied enterprise value of US$758 Sources: EY Innovalue, Capital IQ (www.capitaliq.com, North America). The financial terms of 15 million, and representing a 26.8x EBITDA accessed on 20 July 2017), Mergerstat M&A Database. transactions were disclosed in Q2 2017, multiple and a 1.3x revenue multiple.10 amounting to a total volume of US$4 For First Data, the acquisition not only billion.7 This represents a 35% decrease increases its North American merchant over the Q2 2016 deal volume.8 portfolio and distribution capabilities, but also enhances its value proposition and The announced acquisition of CardConnect technological prowess. CardConnect’s by First Data Corporation accounted for existing relationships with independent 7 Sources: http://bankinnovation.net/2017/03/ 19% of the total disclosed transaction volume software vendors along with its technology, vantiv-beats-firstdata-as-largest-u-s-merchant- in Q2 2017. CardConnect, headquartered salesforce and integration teams will acquirer/ (accessed on 14 July 2017) in the US, is a registered Independent support First Data’s independent software 8 Sources: EY Innovalue analysis, Bloomberg, CapitalIQ (www.capitaliq.com, accessed on 20 Sales Organisation (ISO) of Wells Fargo, vendors initiative. Moreover, ardConnect’s July 2017), Mergermarket, EY Innovalue analysis serving 67,000 merchants across the US payments platform can accelerate merchant 9 Sources: CardConnect Annual Report 2016, and processing a card transaction volume on-boarding and streamline partner https://cardconnect.com (accessed on 20 July 2017) of US$22 billion. The company provides management, and secure integration of 10 Sources: EY Innovalue analysis, CapitalIQ an omnichannel payments processing payment data with ERP software remains a (www.capitaliq.com, accessed on 20 July 2017)
Figure 13: M&A market development Figure 14: Business valuation multiples Figure 15: Targets by region (in percentage)
70 2 30 2017 70 70 16x 14.5 14.7 14.4 3 13.1 22 60 60 14x 2017 1
12x 50 45 50 10.6 41 10x 40 40 37 8x 36 30 30 19 6x 3.7 3.5 20 20 2.8 4x 2.3 1.6 3 10 6.1 3.9 3.4 5.5 4.0 10 2x
0 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 0 0 2013 2014 2015 2016 2017 North America Middle East and Africa (MEA) Number of transactions EBITDA multiple Europe Oceania Disclosed value (in US$ billion) Revenue multiple Asia South America
Payments Volume 17 16 The decline in deals in Q2 was M&A roundup driven by a drop-off in Asia.
implied enterprise value of US$1,381 million (4.4x revenue, and 14.1x EBITDA).15 In North America, FleetCor, the highly acquisitive fuel and commercial cards issuer, paid US$675 million for cross- border B2B payment provider, Cambridge Global Payments, in one of the largest transactions of Q2 2017.16
growing customer need, both in the private equity houses aiming to create a medium and large segments.11 payments champion in the Germany, Switzerland and Austria region completed The median EBITDA-multiple from 2016 the first initiative in their buy and build to 2017 increased from 10.6x to 14.4x. strategy by acquiring Ratepay. Ratepay, The median revenue multiple for the formerly the payment services arm of same period decreased from 2.3x to 1.6x. German e-commerce retailer, Otto Group, Harland Clarke Holdings’ acquisition of provides processing for some of the Andreas Habersetzer online couponing provider, RetailMeNot, widely accepted prominent online payment for US$688 million at an implied methods for German consumers, including enterprise value of US$455 million, equates invoicing, direct debit and prepayment, and to a multiple of 1.6x revenue or 14.6x will be integrated in the payments platform EBITDA. Investors are constantly evaluating of Concardis.13 Meanwhile, Concardis’ key the potential disruptive nature of target competitor in the market, B+S Card Service, companies in the payments sector, and, has announced that it will merge with the consequently, revise the transaction online payment services provider, PAYONE, multiples of their offers, leading to a deal in the third quarter of 2017 and will be landscape that displays a diverse range renamed BS PAYONE.14 In the Nordics, Markus Massem of valuations.12 Swedbank acquired PayEx, a payment services provider, for an undisclosed amount. In Q2 2017, 41% of the targets were In Russia, Otkritie, a Russian provider based in North America, followed by 38% of banking, investment management in Europe and 22% in Asia. In Europe, and insurance solutions, offered to buy the German payments market appears to Nasdaq-listed Qiwi, an operator of be in a consolidation phase. Following the physical and online payment systems acquisition of Concardis by Bain Capital in the Russian Federation, for a total and Advent International in Q1, the two consideration of US$695 million at an Apostolos Psaras
11 Sources: www.investors.cardconnect.com (accessed on 14 July 2017) 12 Sources: EY Innovalue analysis, Bloomberg, CapitalIQ (www.capitaliq.com, accessed on 14 July 2017), Mergermarket (accessed on 14 July 2017) 13 Sources: www.adventinternational.com (accessed on 13 July 2017) 14 Sources: www.payone.com (accessed on 13 July 2017) 15 Sources: CapitalIQ (www.capitaliq.com, accessed on 14 July 2017) 16 Sources: www.fleetcor.com (accessed on 12 July 2017)
Payments Volume 17 17 Venture Capital roundup
Figure 16: Venture Capital deal
2,000 44 50 45 1,750 40 40 1,500 30 35 1,250 30
1,000 25
20 750 15 500 10 250 505 753 1,938 5 0 2016Q4 2017Q1 2017Q2 0 Number of investments Disclosed value (US$ billion)
Figure 17: Investment by region (in percentage)