A NEW MODEL OF PAYMENT: THE REVOLUTION OF VIRTUAL WALLETS NEW WALLETS The conquering of The end of money 01 the new wallet 02 in ? market

No fear of wallets INTERVIEW INFOGRAPHIC 03 04 Álvaro Martín (Afi) 05 The boom of the wallets

FINTECH SERIE BY innovation edge 01 The conquering of the new wallet market

Apple Pay and Google Wallet are fighting for a market that will revolutionize the payment system ( ).

FINTECH SERIE· SEPTEMBER 2015 · www.centrodeinnovacionbbva.com/en Banks, technology companies, For the journalist specializing card brands and payment in technology Robert D. processors, handset Hof, the key to success of manufacturers and mobile , which was operators have embarked on launched in 2014, is the conquering the wallet market . simplicity: "Like Apple made A business that is buoyant and it easier to use a computer, is closely linked to the cell listen to music and phone boom. There communicate quickly, Apple are virtual wallets where you Pay tries to do the same to can store information on purchase goods and services payment cards, bank online and in physical accounts and other personal locations. financial tools. And, what is more important: they allow Each financial innovation from payments to be made the invention of money to the virtually. credit card has reduced friction in trade and has The struggle for the accelerated the pace of trade. hegemony of this market in Apple Pay eliminates scribbling the US is being fought out signatures, having to show an by Apple Pay and Google identification card or other Wallet. A struggle that problems related to previous Samsung has joined with a fair payment methods.” ( ) amount of ambition.

FINTECH SERIE· SEPTEMBER 2015 · www.centrodeinnovacionbbva.com/en Hof also notes that "it also is done through the user's the company's desire to firmly works better than previous fingerprint, reinforcing fight with Google in the race to mobile services. Apple Pay security but not everything is lead electronic payments. operates automatically when perfect in Apple Pay as Hof the phone is placed next to the says, "Today only people with payment terminal, without the new iPhone 6 may use having to open an Apple Pay in shops, but 98% application such as was the of stores in the country do not case with Google Wallet or have payment terminals that PayPal. accept it.”

By pressing the thumbprint on According to Hof, "Apple Pay is the phone the need for a PIN far from replacing some of the is avoided and the transaction things that we usually carry in takes place quicker. It works our wallets, including popular for booking a room in Airbnb rewards cards from stores. The or buying a sandwich at Starbucks app, which is a Subway. It merges the virtual combination of a store locator, and physical worlds of rewards card and payment commerce in a way that no engine all in one, is still the other payment system has most used for mobile achieved.” payments in retail outlets.”

The big feature incorporated in Apple Pay was launched in the Apple Pay is that identification UK in July 2015, confirming

FINTECH SERIE· SEPTEMBER 2015 · www.centrodeinnovacionbbva.com/en Android Pay: Google's reaction Meanwhile, Google is not giving up and doesn't want to lose this war. In February 2015 it reached an agreement with Softcard, a mobile app owned by three mobile telecommunications operators (Verizon, AT&T and T-Mobile), to install Google Wallet on their phones and in September launched its Android Pay payment system, an evolved version of Google Wallet -a pioneer in 2011 but failed to succeed in the market-.

A similar system to Apple Pay, with the difference that the Google system can be used with mobile phones using the Android operating system instead of Apple iPhones.

It works on all Android OS terminals equipped with NFC, short-distance communication technology, which allows two close devices to physically share information. To pay by cell phone, all you will need to do is touch the phone with the credit card terminal so that a connection is made via NFC.

FINTECH SERIE· SEPTEMBER 2015 · www.centrodeinnovacionbbva.com/en As this PwC report explains, , reduces the chance that the at an accelerated pace. There NFC (Near Field signal is interfered with or data are already three million of Communication) technology, is stolen. One hundred million them in the world that accept "is a wireless technology customers worldwide use NFC NFC. Apple gave a big boost launched in 2003 that uses technology, according to data to this technology when it short-range waves to connect from Juniper Research in announced that Apple Pay, two devices, which allows 2014 and will exceed 500 which was launched in the US transactions between a cell million in 2019, as many new in 2014, would work with phone and a previously- cell phones will incorporate it. NFC". adapted POS terminal. Its "Its adoption by commercial range is 20 centimeters, but establishments is also growing the ideal distance for it to work is four centimeters, which means the cell phone must be moved much closer to the terminal in the store to make the payment.”

The consultancy firm emphasizes in its report that it is precisely this requirement which, although it makes the operation less comfortable than with other technologies,

FINTECH SERIE· SEPTEMBER 2015 · www.centrodeinnovacionbbva.com/en Samsung Wallet's struggle

Samsung Wallet has been the Transmission) technology. The war for this market has latest to join the fight for MST technology makes it just begun. A market that will mobile payment. For this, the possible to make mobile move billions of dollars every Samsung Galaxy S6 Edge and payments with data phones day. As noted by Ed the Samsung Galaxy Note 5 that do not have NFC McLaughlin, head of emerging already has Samsung Pay technology, but the usual payments at MasterCard, "We installed as standard. The magnetic receiver. It works by know that if people use company's new service was creating varying magnetic phones to pay two or three launched in South Korea in fields when the user wants to times, then they aren't going August and in the United initiate a payment and allows to return to their old States in September 2015. It Samsung Pay to be compatible behavior." The fight is over works with NFC and MST from the outset with many which model to use. (Magnetic Secure dataphones worldwide.

FINTECH SERIE· SEPTEMBER 2015 · www.centrodeinnovacionbbva.com/en 02 The end of money in cash?

Cash is by far the most used payment channel in the world, although in the digital age, smartphones aspire to be our new wallet ( ).

"Cash is expensive, dirty, not new competitors such as very trustworthy and doesn't Google, Facebook provide public income." This and Amazon are facing sure is how Mehmet Sezgin, head death". of BBVA payment channels, categorically defended the Europe seems to opt for cash: Wallet mobile payment system Denmark has launched an in this interview in July. A year electoral proposed plan to earlier, Francisco Gonzalez, put an end to physical money presidente of BBVA, declared in many everyday transactions in the Financial Times that: made by citizens. The "Banks that aren't prepared for Nordic country aims to finish

FINTECH SERIE · SEPTEMBER 2015 · www.centrodeinnovacionbbva.com/en up with plastic money in it predicts that this situation clothes stores, gas stations will become a reality in 2030. and restaurants. With 5.6 million inhabitants, Denmark Germany doesn't want to be says that it will stop left behind either. One of its minting coins in 2016. wise economists, Peter Bofinger, had no qualms One out of every three about classifying physical inhabitants already uses money as "outdated" in MobilePay, the DanksBank this interview in the Spiegel application that lets users newspaper. "Notes and coins digitally transfer money to in are obsolete and other phones or accounts. only reduce the influence of central banks. The federal is also working government should abolish intensively in this race to the use of cash. Taking into achieve a cashless society, account the technical and according to The Royal possibilities nowadays, notes Institute of Technology in and coins are outdated.” ( ) Stockholm, it's close to Bofinger went a step further: becoming a society in which "If we get rid of money, the payments are made black market and the drugs exclusively using virtual payment systems and

FINTECH SERIE · SEPTEMBER 2015 · www.centrodeinnovacionbbva.com/en The entrance of cell phones in

payment systems ( )

Cell phones are the tool to put Phones are the best way to an end to notes and coins, digitalize, not just cash, explained Mehmet Sezgin but also cards. As with the in El País: "We are moving chip technology, European towards a cashless society. We banks have once again taken want to move from coins the initiative. Mastercard and to cards, and from cards to the Visa have already said that in market will come to an end. It so-called cashless society. It's 2020 all point of sale will also be easier for central not an easy evolution, but terminals will have contactless banks to fulfil their monetary we think that cell phones are services. This means that you policies”. These ideas are shared one of the best ways to could pay with your phone by the former Treasury execute this transformation. and you won't have to ever Secretary of the United States, use plastic money again". Larry Summers, and economist A smartphone is basically a Kenneth Rogoffque, who points computer, which means that Following on with this idea, towards cash as the main cause each of our customers has ‘The Payment Channels’ report, behind tax evasion. a computer in their pocket. a moving landscape,

FINTECH SERIE · SEPTEMBER 2015 · www.centrodeinnovacionbbva.com/en prepared by the PwC e IE through mobile devices. Business School Financial Smartphones will become Sector Centre classifies wallets. They will replace cell phones as "predators": computers for online Since they started becoming purchases and will put an popular in the '90s, mobile end to physical cards devices have acted as digital for transactions in stores. It's predators because, to a a radical and inevitable greater or lesser extent, they change, similar to that have replaced photographic represented by the cameras, computers, books, appearance of cards, but it will newspapers, music players, be more gradual. Partly radios, televisions, watches, because the new board games and calculators, payment channels suffer from and it's possible that they'll end dispersion, insufficient up doing the same thing with information, limited incentives cash". for use and a lack of leadership from the agents". And it stresses: "New payment channels will gradually replace A slow and long road, since: conventional methods and "Cash is by far the most used there will come a time when payment channel in the world. almost all transactions will be According to approximate conducted online, especially estimates, 85% of transactions

FINTECH SERIE · SEPTEMBER 2015 · www.centrodeinnovacionbbva.com/en and 60% of their value are made with cold hard cash.”

To put an end to this supremacy, the study states that: "Wallets, or mobile purses, are one of the payment channels with the greatest projection, due to their easy usability and their adaption to the smartphone ecosystem. Some think that in the not so distant future, people could leave their house without their wallet; just their phone.”

This is a goal that both governments and banks have been relentlessly pursuing in recent years.

FINTECH SERIE· SEPTEMBER 2015 · www.centrodeinnovacionbbva.com/en 03 No fear of wallets Users are increasingly taking to this payment channel, and while there is still a fear of data loss and identity theft when using cellphones instead of cash, it is diminishing ( ).

Although a few years ago they make, although the fears security was one of users' that deter them from unlimited main concerns when making use of their wallets include virtual payments, today identity theft or additional consumers are more confident charges on their purchases. about the ubiquity of their cellphones and the payments

FINTECH SERIE · SEPTEMBER 2015 · www.centrodeinnovacionbbva.com/en What are customers wallets surveyed, who do so What are the fears looking for with their fairly frequently –between two preventing people from virtual wallets? And and three times a week. taking up this new payment companies? Who will win model? the race for the wallet This study points out that the People who do not use wallets market? The study entitled number of users who have fear their identity may be ‘The Future of the Mobile joined the world of the wallet stolen, and are also concerned Wallet: Barriers and and who plan to use it in about the theft of their opportunities’ for the next future has multiplied in the personal information, loss of stage of the mobile payment last six months. Although data and that their cellphone revolution asks these security is the number-one may be used to make questions –and others– in an barrier to using the mobile transactions. analysis of one of the financial wallet, users are gradually trends that looks set to becoming less fearful. revolutionize the world of payments. While in 2013 73% of users said they were concerned The observation of Ed about security, two years McLaughlin, chief emerging later this percentage has payments officer at dropped to 62%. Even so, MasterCard –"We know security and concern about after people tap their phone new charges after a purchase to pay two or three times, continue to hold back this they don’t go back to their business. old behavior"– appears to be true for the users of virtual FINTECH SERIE · SEPTEMBER 2015 · www.centrodeinnovacionbbva.com/en Although it is not all bad news for the companies looking to wean people from cash and get them hooked on making payments with their cellphones. These apps are today becoming increasingly familiar and the fears are abating. Every day people are becoming a little more comfortable with this type of online payments, and say they are satisfied. they will be quite willing to security code, so they don't How can I convince someone give up using physical money. share the actual card numbers to use a wallet? ( ) To achieve complete security, with the vendor, nor are The study claims that if the banks and companies are they transmitted when the technology companies, banks, opting to change the real payment is made. This means cellphone manufacturers and numbers of data on cards for they do not need to show the mobile telephone operators encrypted ones. credit or debit card and reveal that are competing to acquire their identity –an additional this business are able When someone makes a layer of privacy that to guarantee that fraud or purchase, they use the guarantees that this the theft of people's data or number of the information is never lost and identity is 100% impossible, device together with the is always completely private.

FINTECH SERIE· SEPTEMBER 2015 · www.centrodeinnovacionbbva.com/en The key year( )

2015 is the year mobile payments are set to take off. 15% of people have used wallets in the last six months, and 22% plan to use them in the next six months. Companies are already offering discounts or other types of incentives to capture more customers.

According to data from PwC, “what is at stake in this strategic tug-of-war is a market amounting to no less than 20 billion dollars”. The study, entitled Payments, a landscape in motion, also highlights that banks are the payment processing agents that inspire most confidence in consumers.

FINTECH SERIE· SEPTEMBER 2015 · www.centrodeinnovacionbbva.com/en There are three main characteristics to succeed in capturing this coveted market:

The support of the leading banks. This 1 ensures trustworthiness and convenience, particularly in the case of your own bank, because you don't have to change your money from one place to another to make payments.

A streamlined no complicated passwords) 2 and secure (absolutely failsafe if the device is stolen, or in the case of identity theft) identification system.

Versatility. In other words, it can be used 3 in all types of commercial establishments (physical and virtual).

The barriers are coming down, and consumers are beginning to switch. The market is now starting to gather momentum, and the sights are firmly set on conquering the payments market. In both the United States and in other continents. Proof of this is the 400,000 European users that already have BBVA Wallet.

FINTECH SERIE· SEPTEMBER 2015 · www.centrodeinnovacionbbva.com/en 04/INTERVIEW “The customer turns to wallets for the added value that cash does not offer”

Álvaro Martín, a partner responsible for the innovation area of Analistas Financieros Internacionales (Afi), looks into the present and future of the wallet market, how technological giants like Google and Apple are set to enter this business, and the role that banks committed to new payment channels will play. ( )

FINTECH SERIE · SEPTEMBER 2015 · www.centrodeinnovacionbbva.com/en How is the payments market use it, although the terminals enable payment channels evolving? ( ) have some limitations for from different banks to be The trend is to replace the making payments, since not used. Other players offering wallet with the smartphone. all of them have the ability solutions to customers We all now have a cell phone, to make payments directly could also emerge. a device with an awesome from smartphones that use capacity, and the market is NFC technology. showing that those of us who thought that physical wallets Should banks fear Apple and for carrying money are going Google in the wallets sector? to disappear were right. Rather than a threat I think it's Wallets are the apps that will an unchartered territory. It's fulfill this task. This is still at a not just banks who think that preliminary stage, but that's this market can be led by the way forward. Google or Apple, there are other players already What kind of customers are developing wallets. It is not yet they aimed at? clear who will make the At this stage it is usually the difference, so to speak. Banks most sophisticated customers, are usually committing with a more curious profile, themselves to closed solutions who want to try new things for their own customers. The and are not afraid of change. difference with what Apple or Some banks are getting Google offer is that these are people to download the app to usually open and

FINTECH SERIE· SEPTEMBER 2015 · www.centrodeinnovacionbbva.com/en The user experience, what is being offered to the easier by linking it to the payment channel. This is end customers when they use this electronic the next stage, and some banks are already doing wallet, is what will determine to a great extent so: building loyalty and providing added value to this which solution will prevail. It is not clear who will payment model. Customers have to be offered win: the banks, the large technology companies something useful, interesting and simple when it or third parties. BBVA, for example, is a pioneer in comes to thinking about the apps they have to open Spain. It has driven this concept and continues or how to find their card. If the experience is simple committed to it both here and in other countries, and offers added value beyond mere transactional and many more banks are working in this area. banking, the more attractive will this world be for customers. What do virtual wallets offer? ( ) The initial value proposition will be linked to the virtualization of payment channels. Instead of using the physical card, I have my smartphone and I don't have to carry cards, and what I'll have is many more cards, because they don't take up space. But that's not enough to justify a technological deployment or achieve a change in consumer habits.

These wallets need to offer more features. Offering the customers customized solutions, analyzing how they behave, what their interests are... with the information that financial institutions have, offering them discounts, promotions, making daily activity

FINTECH SERIE· SEPTEMBER 2015 · www.centrodeinnovacionbbva.com/en Do Google or Apple have more leverage compared with banks for leading this market? The particular advantage that Google and Apple have is the special relationship they maintain with their customers, they have been offering them products and services for some time; they are already internalized in their daily lives, What one sees when new Will cash disappear? and that's one battle they've services that connect bank This is the million-dollar already won. accounts to cards emerge is question. It's hard to imagine a that people are cautious and future with no cash because of The trouble is that money keep an eye on how their the practical problems, but I matters are a bit more information will be used and can't rule it out. It is increasingly complicated than pure how they are going to access senseless. Because of all the communications or searches, their money. In this regard, advantages of electronic which are extremely useful, but banks still have a trust that money, not only for individuals do not entail the critical factor Apple and Google lack. In fact, but for society as a whole, I of handling money. the payment initiatives think that cash should launched by these companies disappear. Although it won't are supported by bank cards. happen in the short term.

FINTECH SERIE· SEPTEMBER 2015 · www.centrodeinnovacionbbva.com/en 05/INFOGRAPHIC The boom of Wallets

The increasing proliferation of online and, particularly, cell phone payments is reshaping the sector worldwide.

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FINTECH SERIE· SEPTEMBER 2015 · www.centrodeinnovacionbbva.com/en Credit cards

Access cards

Vouchers

Loyalty cards

Money transfers

Pocket money

Money transfer Bill payment Retailers Financial Payments operators providers and shops institutions networks

FINTECH SERIE· SEPTEMBER 2015 · www.centrodeinnovacionbbva.com/en Evolution of the payment channels

600 BC to the from 806 AD to present day Checks the present day

600 BC from 321 AD to the present day

Coins Bills

FINTECH SERIE· SEPTEMBER 2015 · www.centrodeinnovacionbbva.com/en 1946 1976 The first bank card, The first debit cards Evolution in the called Charge-it appear in Europe past century

1900 1950 1994 Oil companies create Diners Club launches First M-commerce their first credit cards the first modern experiences credit card

FINTECH SERIE· SEPTEMBER 2015 · www.centrodeinnovacionbbva.com/en 1997 2007 First banking First contactless service over the credit cards Internet

2003 2010 First cards with Square launches integrated chip its app

FINTECH SERIE· SEPTEMBER 2015 · www.centrodeinnovacionbbva.com/en Wallets in figures

Alternatives to cash payment Use of Wallets

Use it Know about it

Transfer money to another person 45% Credit/debit cards

88% 89%

PayPal Pay with credit / debit card 43% 84% 89%

Bank transfer Withdraw money from funds 24%

49% 76%

Cash on delivery Pay with money stored on the 23% 57% 71% cell phone

Finance Keep money on 6% 24% 17% the cell phone Mobile telephony

4% 15%

FINTECH SERIE· SEPTEMBER 2015 · www.centrodeinnovacionbbva.com/en Wallets as a replacement for other payment tools

66% Identification 58% Keys 57% Vouchers 56% Discounts 46% Car / home insurance 31% Tickets

FINTECH SERIE· SEPTEMBER 2015 · www.centrodeinnovacionbbva.com/en Customers expect wallets to include a variety of services

Loyalty program points 57%

Vouchers, discounts and offers 56%

Product price comparisons 52%

Make a reservation at a restaurant 50%

Make a reservation at a restaurant 50%

Ask for the check and pay 50%

Digital purchase receipts 49%

Order before arriving 49%

Digital tickets 48%

Payment card and account balance 48%

FINTECH SERIE· SEPTEMBER 2015 · www.centrodeinnovacionbbva.com/en share

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