Cashing In on Cashless Commerce As frictionless commerce takes hold, the payments industry will be front and center— as a central part of the frictionless experience, as a source of data, and as a key battleground between existing and new players.
Cashing In on Cashless Commerce 1 The Steady Path to Cashless The displacement and even elimination of cash is a topic that has trickled down even to the mainstream media. Amid zero-bound interest rates, some economists have called for a cashless world to usher in more effective monetary policy. In several countries limits on cash usage are already in place, mainly to combat the shadow economy. And the European Central Bank has announced it will end the production of €500 notes. The move to cashless options has even led to a backlash in which some defend their right to pay with cash as a civil right, and politicians and central bankers must assure citizens that they will maintain their right to use their money as they please.1
So why are we raising the topic of cash again, in a document that is intended to be neither a macroeconomic policy paper nor a socio-political manifesto, but rather a business perspective? Because, as Bob Dylan put it, “the times they are a-changin’.”
That’s because the changes start not with how we pay, but rather how we conduct commerce and use services. And those changes are having a profound impact on the payments industry, the use of payment methods, and the distribution of revenues and costs among payments players.
As the world moves toward frictionless commerce, seamless payments will be crucial.
Payments: From Cash to Cashless to Seamless Noncash payments have grown 6 percent annually across Europe over the past decade—roughly two percentage points higher than GDP (see figure 1).2 We estimate that by 2022 there will be
Figure The shift to noncash payments will continue over the next years
Billions of transactions Europe +% % Alternative payments % Cheques +% % % Cards +% % ACH % % % % % % %
% % % %
F F F
Notes: ACH is Automated Clearing House (credit transfers, direct debits). Europe includes the EU, Norway, Russia, Switzerland, and Turkey. Source: A.T. Kearney Payments Market Model
1 See Rogoff (2014), Costs and benefits of phasing out paper currency; Carl-Ludwig Thiele (2016), Die Zukunft des Bargelds, 8. Forum Privater Haushalt “Geld – geprägte Freiheit für den Verbraucher?”, 13 April, 2016. 2 Source: A.T. Kearney Payments Market Model (2016), with input from ECB Statistical Data Warehouse (2015) and BIS Red Book (2015); GDP forecasting to 2025 from the Economist Intelligence Unit (2016). Europe includes the 28 countries of the European Union plus Norway, Russia, Switzerland, and Turkey.
Cashing In on Cashless Commerce 1 more cashless transactions in Europe than those using cash—a landscape that already exists in parts of Northern Europe. Around the same time, one in 10 noncash payments will be made through alternative payment methods, typically with providers other than a consumer’s primary bank. This is a wake-up call for traditional providers, as the alternatives will end up with the bulk of a transaction’s profits.
We recently interviewed more than 50 payment experts from banks, acquirers, payment service providers (PSPs), and retailers about their expectations, and they too expect growth to noncash volume growth to continue, roughly 2 to 10 percent per year. This outlook is unsurprisingly positive, however there is a surprising element: Two-thirds of respondents predicted an increasing share of card payments, which runs contrary to some analyst predictions about cards being replaced by mobile and account-based payments. Indeed, our own analysis points to the card’s continued advance, with use that will actually increase more quickly and soon surpass 100 times card payments per capita per year. Several European countries have already reached this level, in fact, including France, the Netherlands, Sweden, and the UK (see figure 2).
Figure ATM cash withdrawals vs. point-of-sale card transactions: Cash displacement is accelerating
50
a it 45 UK
cap PT r 40 ET
pe FI
s 35 BE al DE 30
aw AT
dr 25 FR th LI NL
wi 20 SE PL ES 15 CH
cash TR CZ
M 10 IT
AT Growth of cash
5 and point-of-sale Accelerated of card payments cash displacements # 0 0102030405060708090 100 110120 130 140150 160170 180190 200 210 220 230 240 # of POS card payments per capita
Turkey & Switzerland: data for – Sources: BIS, ECB; A.T. Kearney analysis
However, this displacement of cash is not happening at the same speed in every situation. Looking at A.T. Kearney’s Wheel of Payments, shown in figure 3 on page 3, our analysis confirms the potential size of face-to-face noncash payments, with more than 450 payments per person per year in Europe. At the same time, e- and m-commerce situations are comparably small. However, with more cross-channel shopping taking place (for example, at one large electronics retailer, 40 percent of online orders are picked up in store) and retailers
Cashing In on Cashless Commerce 2 Figure There’s room for growth across payment situations—with F F and P P as the biggest opportunities
Payments per capita per year Europe Person-to-person (P P): Business and administration: Domestic mobile services and SMEs as main innovation area international remittance
Recurring payments: More control for payers (“request-to-pay”) yearly payments per capita E-commerce: Convenient checkout, wallets, mobile Face-to-face (F F): Displacing cash and Light shading: checks beyond retail: Paid in cash or check education, care, services Dark shading: Paid by card, direct debit, or credit transfer
Note: Figures are for the European Economic Area. Source: A.T. Kearney analysis
looking to offer similarly comprehensive solutions offline as online (where they know the name of the customer, have a shopping history, and can manage e-receipts), e-commerce is also playing a role in face-to-face commerce.
The move to a cashless society is bringing about profound change for the payments industry–not just in how we pay, but how we conduct commerce and use services.
When we asked payment experts where they see the most potential, opinions differed on person-to-person, which some considered strategically relevant rather than from a direct commercial impact. Also it was clear that the biggest potential and respective internal priority areas are seen in e-commerce and face-to-face payment situations, while business-to-business or recurring payments are considered well solved (see figure 4 on page 4).
Cashing In on Cashless Commerce 3 Figure E Commerce and face-to-face are seen as the main priority areas—with impact from regulation and new players
Shaping forces Internal priority areas External disruptors (% of respondents, n=) (% of respondents, n=)
E-commerce % PSD/XSA %
Mobile wallets % Face-to-face %
Instant payments % Person-to-person % Tokenization %
Business-to-business % Blockchain %
Recurring payments % Others %
Notes: PSD = Payment Services Account Directive ; XSA = Access-to-Accounts Source: A.T. Kearney survey of payments industry experts
Across all different payment situations, however, a few trends are seen as driving change, and specifically leading to the rise of cashless transactions:
• Connected consumers with a growing preference for cashless. Most people today are connected to the Internet nearly all day long. At the same time, a variety of surveys indicate the growing preference—particularly among younger consumers—to use cashless payment instruments.
• Connected devices with new situations for commerce and services. The number of connected devices will grow from around 12 billion in 2015 to more than 30 billion by 2020 and will expand from traditional connected devices (computers, mobile phones) to new ones in health, mobility, smart home, and other areas—each with unique new opportunities for transactions and payments.3
• Lower costs for merchants and billers. With interchange fees now down to 0.3 percent for credit and 0.2 percent for debit cards, it is much cheaper for merchants to accept cards. Today there are few situations left in which cash is less costly to a merchant than a card payment.
• Deeper integration of services. Service providers and retailers are combining mobile devices and technologies with data and payment functionality to improve the customer journey. This includes targeted offers using geolocation, more convenient checkout, and new payment and financing options—all based on cashless transactions.
These trends are leading to a major change on the horizon: the need for seamless payments as frictionless commerce rises.
3 Source: BI Intelligence (2015), The Internet of Everything: 2015. Other estimates go even higher; for example, Cisco expects 50 million connected devices by 2020.
Cashing In on Cashless Commerce 4 Seamless Payments and Frictionless Commerce “Frictionless” commerce occurs when a consumer purchase is automatically initiated without an explicit consumer purchase decision. Instead, purchase decisions are made on behalf of the consumer, with his or her advance consent, using real-time, integrated data from preferences, past behaviors, sensors, and other sources of contextual data.
As customers increasingly opt for the convenience of frictionless buying, enabled by connected devices with increasingly strong capabilities, it is easy to imagine how frictionless commerce could take a stronger hold on our commercial world. The sidebar, A “Frictionless Day,” shows what a frictionless world could look like.
Any move to frictionless commerce requires seamless payments to keep pace. Seamless payments are a major step forward compared to traditional ways to make credit transfers or POS
A “Frictionless Day”
What would it look like for a actively made a payment? The like—perhaps in the consumer to have a “frictionless figure below is an attempt to not-so-distant future. day,” one in which he or she never show what that could look
Figure A Day in the Frictionless Life
Smart appliances The customer's connected coee machine detects that he is low on coee pods and automatically triggers a delivery of and automatic payment for new pods. Facial recognition The customer walks into a convenience store and selects the products he wants, and, thanks to facial recognition, is automatically charged as he walks out. Toll-road pass As the customer drives on the toll road, his license plate number is scanned upon entering and existing, and payment is automatically triggered a payment.
Subscription to razor service The customer’s monthly shipment of new razors arrives—he was automatically charged upon arrival. Preventative maintenance A smart home system detects that a light bulb is out and automatically orders a new one, which is delivered to the customer's car by a courier who uses a keyless entry to put the bulb in the car. Payment is triggered Anticipated need upon delivery. The customer orders a lashlight from an e-commerce site for a weekend hike. The e-tailer, using data about use patterns to predict the Entertainment purchase, has already shipped it to a local While eating his dinner, delivery center. The order, to the customer’s the customer streams a TV surprise, is delivered within a few hours. show on a content provider that charges him automatically on a monthly basis.
Source: A.T. Kearney analysis
Cashing In on Cashless Commerce 5 payments by using logins, filling out forms and data, or authorizing transactions through PIN numbers or transaction codes. In more seamless payments systems, orders are pre-filled and can be automatically or at least conveniently authorized such as with fingerprints or facial recognition. As this makes it easier for consumers, it also boosts commerce in general.
Many e-commerce merchants claim that payments cause more customers to drop out than any previous steps in the shopping process. However, technological advances are breaking down many of these barriers and making seamless payments more possible than ever before.
This is a big step forward from what we could call the “traditional digital” offerings now widespread in both physical and digital channels—where a merchant and later a consumer (or business) actively initiates, authenticates, and confirms a payment. Seamless payments would remove that need. Technological advances are breaking down barriers and making seamless payments more possible than ever before.
When looking at four ways in which frictionless commerce could play out, seamless payments play a central role.
1. In-store. Consumers purchase goods or services in a store but can pay without either initiating or confirming a payment. The consumer is recognized (perhaps by facial recognition), picks up the goods of choice, and then walks out of the retail outlet, with the payment taken care of in the background based on pre-provided information and consent.
2. Subscription. Subscriptions reduce the friction to a one-time effort of setting up a payment; further payments are executed in the background automatically without additional user intervention. This is now widespread in gaming, media, and in some repeat purchases of goods and services online.
3. Sensor-based. Sensors in certain devices initiate a repurchase of certain products or trigger a service. Potential applications include a smart fridge that senses when items are running low, coffee machines that order coffee pods, and cars that can automatically pay for parking, tollways, or petrol.
4. Predictive. Predictive transactions would be triggered based on patterns and data analysis and initiated automatically—event calendars, crowd movements, weather forecasts, or medical data could trigger the shipping of certain goods, for instance. Amazon holds a patent to anticipate local shopping needs in order to initiate shipping even before customers order.
Frictionless models are already taking hold, and payments is central to removing the friction. For Uber riders, after setting up payment information upon first use, payments are automatically initiated once a ride is finished. Amazon’s Dash buttons allow customers to reorder various home supplies at the push of a Wi-Fi-enabled button (see sidebar: Frictionless Beyond Retail on page 7).
Cashing In on Cashless Commerce 6 Frictionless Beyond Retail
Beyond retail, frictionless • Mobility. From accessing and of the friction, particularly in principles will spread across the paying for car sharing vehicles authenticating and managing consumer, business, and adminis- with a mobile phone, all the way related payment flows. tration domains. Some of the key to paying for gasoline based on • Amusement. Disney offers an examples include: plate number or some type of example of removing the in-car sensor, the smart car friction from enjoying its parks. • Person-to-person payments. offers many options for It provides visitors with a Initiating or collecting a frictionless commerce. wristband that not only allows payment when paying for • Supply chains. Robots ordering park and hotel room access but someone else or splitting the and steering intelligent objects also allows them to pay across bill, for instance, could occur (for example, with RFID chips) the theme park with a simple through a phone’s voice control. including ordering, billing, and swipe of their wristband. It also • Public transportation. A phone payment in the background gives Disney the ability to track could check in a passenger the movement of individual • Public administration. Public automatically based on visits across the park. administration can take existing location, with all ticketing and digital services (such as tax billing happening in the declarations) and remove much background.
Overchoice: Managing Innovation and Complexity Innovation across every step in commerce—including, of course, payments—will boost the spread and growth of frictionless commerce. This innovation, however, comes at the price of more choice and complexity. Indeed, there is so much going on in payments today that it often deters consumers and businesses alike from adopting payment techniques and options that would be better than what they use today. For the industry and for users, it is important to separate the wheat from the chaff.
Today’s payment options start with the myriad card payment labels and spread to include PayPal and other online payment options available regionally or globally—all of which are seeking to become multi-channel, multi-situational, multi-country leaders. If you are a consumer, it can be tough to pick one; for retailers, there’s a real question about which payments are worth offering on which channels, taking into account consumer and staff needs as well as reach, conversion, cost, data, loyalty, and marketing. And then there are simple yet thorny problems, like handling physical returns of online purchases in stores where the original payment system (say, PayPal) isn’t offered.
To address this, it’s important to navigate and understand each choice that needs to be made (see figure 5 on page 8).
Method. In Europe alone, there are more than 20 relevant domestic and international POS card schemes, and more than 200 alternative payment methods (such as wallets and online banking e-payments, or OBeP) to choose from. This happens in stores, too: A German brick-and-mortar retailer recently counted 70 methods it accepts, including local voucher systems.
Form factor. The world is moving beyond paper and plastic to mobile phones, smartwatches, wristbands, and other wearables that include the ability to make payments. The Internet of Things, including smart homes and cars, represents the next big wave.
Cashing In on Cashless Commerce 7 Figure Payments are evolving, from innovation and choice to complexity and fragmentation
Credit Pre-paid Others/ Cash Credit card Debit cardWallets OBeP Voucher Cheque transfer/ 1 Method card alternative direct debit
Mobile Mobile Smart Customer Online Mobility Paper Plastic phone app Wearable QR code home Others 2 (website) and IoT form factor (hardware) (software) device
Chip Internet ‘Over Dedicated Counter Mag-stripe NFC BLE SMS Others 3 Transmission (EMV) protocol the air‘ WLAN
Other Voice None Signature PIN Password Fingerprint TAN ID card3D Secure biometric 4 Authentication recognition methods
Frictionless POS Mobile Self- Counter Website Telephony ECR App (e.g. Others 5 Acceptance terminal POS checkout sensors)
Corres- Card Direct ACHPSP On-us Blockchain pondent Others 6 Processing scheme bank link bank
Current Credit Stored Virtual Loyalty Mobile Bitcoin Others 7 Funding account card value currency points invoice account
Notes: ACH = Automated Clearing House; BLE = Bluetooth Low Energy; ECR = Electronic Cash Register; EMV = Chip standard of EMVCo; ID = identity; IoT = Internet of Things; NFC = Near Field Communication; OBeP = Online nanking e-payments (e.g. iDeal, giropay); POS = Point of Sale; PSP = Payment Service Provider; QR = Quick Response Code; TAN = Transaction Authentication Number; WLAN = Wireless Local Area Network; D Secure = -factor authentication (e.g. MasterCard SecureCode) Source: A.T. Kearney analysis
Transmission. Contactless technologies, especially near-field communication (NFC), Bluetooth low energy (BLE), and wireless local area network (WLAN), will go beyond payments to new customer journeys—for example, locating a potential customer in a nearby shop or restaurant using BLE. In the background, tokenization is important for protecting data and limiting fraud.
Authentication. Making sure a person is who he claims to be in a world of both frictionless commerce and large-scale fraud is a specific challenge. Passive techniques such as device fingerprinting combined with biometric options (such as Apple's iTouch, Google speech recog- nition, or Starbucks’ use of facial recognition) are steps toward bridging these needs.
Acceptance. Acceptance of alternate technologies is spreading as channel preferences change and through terminal exchange cycles. The biggest change, however, will come as mobile devices and apps allow self or assisted checkout that don’t require cashiers. More of these types of changes will come as the technology improves.
Processing. This is a traditionally slow-changing element, yet even it is seeing increased dynamics. European ACH systems just revamped in the wake of the SEPA introduction and are investing in “instant” payments. Card schemes are separating their processing from their schemes. And blockchain could eventually replace central processing topologies, although experts are still seeking empirical examples of tangible benefits and our interviewees considered it the least relevant factor in the list of options we asked them to prioritize.
Funding and accounts. The current account is no longer the only funding of payment methods. Although cryptocurrencies have not yet entered daily business, different forms of prepaid credit (including those used in online games), air miles, and other loyalty points are already there.
Cashing In on Cashless Commerce 8 Blockchain promises an alternative bookkeeping and account mechanism (see sidebar: Spotlight on Blockchain).
Most likely, we are only seeing the beginning of this proliferation of options. It is already making a relevant impact, with alternative payments now accounting for 4 percent of all noncash payments—up from 2 percent in 2010. This is a big change, one that requires retailers to make smart choices now, on all levels, for instance:
• Which methods maximize consumer reach, conversion, and convenience without driving up internal costs and effort?
• How can you redesign the customer journey and experience to capitalize fully on new devices, transmission, and authentication technologies?
• How can technology and partnerships improve how you manage loyalty and determine which data to seek, share, or protect?
• How can you protect customer relationships and ownership and add value if you no longer have direct customer access?
• What funding sources should you allow to respond to diverging customer and money-management interests? How can your security improve convenience needs while limiting fraud costs?
Spotlight on Blockchain
Blockchain technology relies for diamond certification and Deutsche Bank, that experiments on the concept of distributed related transition history. with blockchain for transfer storage of information in the form financial assets. Nordic processor of chains of datablocks. The strict Can the blockchain be a new Nets opened a lab seeking position of information in the railway for payment transactions blockchain use in payments. Visa chain and storing it on multiple and replace the existing and MasterCard have announced computers as opposed to one processing infrastructure? The similar interests. central ledger or hub, make the answer to this remains unclear, blockchain model very secure and ongoing projects are and limit the need for central exploring its applicability to the processing or storage hubs as financial world. International we know them today. money transfers (remittance) are one of the most prominent uses— Three main uses of blockchain if blockchain in that realm can have emerged at this point: proof remain fast and low-cost, it could of original existence (such as for have a bright future overcoming patents, digital IP, wills, and land the traditional cost and time titles), proof of transferring issues. One startup that works ownership (for example, for with blockchain in this realm, cryptocurrencies like bitcoin, Ripple, showed how important financial assets, or diamonds), it is to get bank support for and proof of certification (for sustainable progress. example, with prescription drugs, identification, degrees, The blockchain game has a long and awards). Everledger has way to go. Many new projects are developed one of the most bubbling up. R3CEV is a global interesting uses of blockchain— consortium of 40 banks, including a permanent and global ledger ING, Barclays, Santander, and
Cashing In on Cashless Commerce 9 The answers to all of these questions will be different by sector; while payments are a key area, the shopping experience and customer journey overall will answer some key questions and help to navigate through our growing “overchoice” dilemma. In transit, a universal solution based on contactless cards might be the right choice; in electronics, where financing is important to offer and capture, a mobile solution might be more appropriate; in mobility-related areas such as gas, parking, and service, an IoT-based solution with number plates identifying the car rather than the driver could be the right option. Depending on the business priority, service providers and retailers need to select a subset of the key innovations in order to offer the least complex and the most seamless payment experience in each respective situation and use case.
Those providing the payment services to merchants are challenged to extend their service offerings, often by specializing in industry sectors (such as restaurants or large grocery stores) to become a partner rather than a supplier to their customers, the merchants). The buyer is no longer only procurement or the IT department but starts to include stakeholders that have a responsibility for (part of) the customer journey. Involving the business of the merchant requires service providers to come with more integrated solutions and to shift to consultative selling which ultimately leads to a joint designing process of (checkout) experiences. Especially in the online world, merchants also increasingly look for partners that will join them in their internationalization journey and support them in striking the right balance between cross-border, interoperable payment solutions and domestic methods that address local peculiarities like consumer preferences and regulatory standards.
Our survey of payment experts included questions about the key innovation areas. The general consensus is that mobile is the most important area, followed by alternative methods, authentication methods (especially biometrics) and cards, and to a lesser extent cards and processing infrastructure (see figure 6).
Figure Payments leaders expect innovation and complexity to come from developments in mobile payments
Where should payment players focus their e orts in the coming years? (% of respondents, n=)
54%
34% 34% 33%
23%23%
Mobile Alternative Authentication CardsProcessing Others payment methods methods infrastructures
Source: A.T. Kearney survey of payments industry experts
Cashing In on Cashless Commerce 10 Power to the User Control in the payments universe is shifting: from payment providers to consumers, billers and, device makers. In the old world, banks dictated, controlled, and often offered up the infrastructure being used. They provided merchants with a terminal and (part of) the infrastructure, while also providing the consumer with a card. This world is disappearing. In an instant world, payments much more quickly achieve a finality that is hard to revert. Therefore, a different form of control is required.
Consumers. As consumers ride the wave of technological innovation, they are increasingly seeking a frictionless experience—while at the same time demanding data security and privacy risks. The payments experts we surveyed expect mobile to run the show soon, helping users manage their credentials, limits, channels, merchants, and uses—instantly and wherever they are (see figure 7). And instead of every single transaction needing to be actively endorsed, mobile will automatically authorize transactions based on information and notification options.
Three technological advances in particular stand out in giving control to users.
• Permanent authentication. Users are permanently authenticated through a multitude of input factors, eliminating the need for active (and inconvenient) PIN or transaction codes or even fingerprints. For example, a person could be “permanently authenticated” by his or her phone, based on the data it collects about how the person uses the phone, how he or she holds the phone, where he or she uses, it, what his or her voice is like (through the micro- phone)—even heartbeat, if a smartwatch is connected to the phone.
Figure Mobile phones as ‘control tower’
More than % consumer globally say …using their devices in many ways, they are continuously connected… including payments
Check in-app notiications 22% 28% 25% 24% Shop while shopping, product navigation, wish-listing, etc.
18% 21% Share experiences with 23% 26% Share friends via social media, e.g. social shopping, etc.
Research products on the 51% Research go anywhere using mobile 48% applications or websites 42% 42%
Pay in-app, online or Pay in-store (contactless/BLE) 7% 7% 7% 9% using the mobile phone
Global United United Germany States Kingdom Use location services for Locate navigation purposes or in-store All day long Every hour (more than times a day) product locator services, etc.
- times a day Once a day or less
Source: A.T. Kearney Connected Consumer Study
Cashing In on Cashless Commerce 11 • Tokenization. By replacing card details with tokens, security improves and fraud risks go down. A much advocated consumer benefit of tokenization is improved anonymity as the token replaces card details and limits the merchant’s ability to trace the transaction back to an individual. Still, our interviewees considered this technology much less disruptive than other external regulatory, technological and competitive developments—maybe underestimating its use and potential.
• Reporting. With real-time access to their transactions, users can monitor their accounts and take action if needed—object to, endorse, or change payment patterns at any time. Services such as intelligent reporting, spending notifications, insurance, and request for VAT refunds when abroad are a few advances that may emerge.
Billers. Legislation such as PSD2, with its access to accounts and payment initiation to third-party providers, offers opportunities for billers, but our respondents are unsure about whether billers will indeed expand their role significantly (see figure 8). Some argue that players in telco, insurance, and utilities could benefit in particular, but they have big challenges to address before it can take hold. And the value of the opportunity may be too limited for individual billers to decide to develop solutions.
Figure Services competition for (new types of) billers
• Retailers are pushing shopping apps, which need inancial and payment services • Mobility as #1 use case for IoT, followed by smart home • Silicon Valley in 2020: more than 60 New types of connected devices per person (3.5 globally) billers and users
Direct customer Smart FinTech Retail Mobility proposition home
Service API
Competition for best services KYCTXS A Pay rack Reclaim Lend
Account Investment Consumer lending Mortgage
Bank platform: License, balance sheet, risk and compliance, processing
Source: BI Intelligence, US Census Bureau, Silicon Valley Index; A.T. Kearney analysis
Cashing In on Cashless Commerce 12 A couple of other factors are at play. One is the consumer. “Users will trust their bank to protect them and support them more than a multitude of service providers,” says one respondent. Another is how billers engage payments players (particularly FinTechs) and seek specialized solutions that, for example, enable them to pool transactions and capture and share the value.
Overall, development will grow incrementally over the next three to five years, as providers compete against existing and new players, including software manufacturers (such as Google and ERP solutions providers) as well as up-and-coming FinTechs to develop the best digital onboarding, instant finance, and digital loyalty solutions. While many standalone solutions will arise, the winners will be those best embedded in biller value chains while having gained end-consumer trust. Once frictionless commerce picks up, scale, security and convenience will be the most important factors in deciding the winners in the IoT payments market.
Device makers. The Internet of Things, such as connected cars and smart appliances, will allow devices to initiate payments. While it’s generating buzz today across industries, the general consensus is that the impact won’t come until after 2020.
One factor is consumer “control” of their spending. This differs by culture and also the value of transactions, but in general adoption may come slower than the technology. Another factor is the need for global standards to improve interoperability among devices. A fragmented current market is an impediment today.
That said, some use cases may prove nearer than expected. In automotive, there is evidence that wide consumer adoption may not be far, with automakers equipping cars with telematics and insurers quick to develop pay-by-the-mile and behavior-based products. Toll highways and car parks already read our license plate today, so it’s not a giant leap to see the friction removed to allow to by miles driven or minutes parked.
For payments incumbents; play and experiment with uses cases in the near future to build the competence, set the standard and gain the trust of both suppliers and buyers (consumers). For new players in the market, there are enough niches and given the slow pace, incumbents will allow you to play. Once the market picks up it will be scale, security, and convenience that will decide the winner of the IoT payments market.
Growth and Pain: Positioning Your Company in the Sweet Spot Looking over this industry and the excitement it is creating, it’s easy to think there’s a land of gold out there. Payments constitutes one-third of all FinTech ventures, and the payments industry has arguably seen more M&A activity in recent years than any other sector in financial services.
Cashing In on Cashless Commerce 13 However, the fortunes will be unequally spread. While almost all revenue pools will continue to grow in the coming years, for players across the sector, it’s worth keeping an eye on several important shifts (see figure 9).
Figure Revenues will grow, but fortunes will be spread unequally
(Europe, in bn. EUR)
Issuing Acquiring International Alternative ACH ATM payments payments
+ % +% + % + % +%-% ∆
F
Trend from Volume growth Pricing pressure Method shift, Volume growth, Limited direct transaction exceeding balancing higher margins but with little revenues, to card fees margin pressure transaction growth margin lift loss-making
Note: ACH = Automated Clearing House (direct debits, credit transfers) Source: A.T. Kearney Payments Market Model (building on as-is data from the European Central Bank, Bank of International Settlements, and other sources)
Shrinking margins. Margins are shrinking in payments, similar to other scale businesses. While some beneficial new areas have emerged beyond ACH and POS payments, especially in e-commerce, where margins are significantly higher, maturation in those areas coupled with sinking card payment revenues (in the wake of interchange capping) are putting margins under pressure.
In the end, revenues from pure payments could dip. Relevant payments’ value could come from data analytics, customer retention, contact frequency generation, and potential cross-selling of value-added services.
The move from issuing to acquiring. In the next five years there will be a substantial shift in revenue. Issuing was the place to be in cards for a long time, but acquiring will gain significantly going forward. For example in Germany, acquiring has abruptly surpassed issuing in terms of revenues, a trend expected to remain through 2020.
The rise of non-banks. Non-banks are increasingly capturing payment revenues. As much as 30 percent of the payments revenues could be going to non-banks by 2020. This is especially true as roughly 30 percent of ACH and possibly 60 percent of acquiring revenues are outsourced, and as players like Apple “layer” into traditional card payments and PayPal continues to make a
Cashing In on Cashless Commerce 14 big dent in e-commerce payments while branching into face-to-face situations. Meanwhile, banks’ strongest remaining areas will be those with the lowest amounts of growth (ACH, issuing) and those that face continued high investments, such as instant payments.
The rise of payment service providers vs. acquirers. One nascent yet visible development is a shift from traditional acquirers to PSPs, even in face-to-face situations, where they are making inroads with drug store and cosmetics retailers. National railways, for example, seek one provider for e-commerce, mobile terminals, and vending channels. The highest-growing companies in the industry are companies like Adyen or Wirecard, at 40 percent growth (most not through acqui- sition), compared with merely market-level growth for most traditional acquirers.
The growth of global providers over local providers. Some payments segments are already global, such as airline acquiring; others are increasingly moving beyond domestic borders, boosted by SEPA and PSD regulation. Interchange fee caps have significantly increased the business case for reducing complexity across different countries by combining providers, rather than optimizing local interchange and domestic scheme usage in each country when there are significant interchange differences.
This trend would tie to the changes we’re seeing in other areas of e- and m-commerce. For example, Airbnb and Uber embed background payments functions in their services, and they source providers for this on a global basis (possibly with regional, but not national, twists).
Volume shifts to ACH. Our forecasts point to card growth based primarily on e-commerce and contactless growth. However, if PSD2 and its access-to-accounts is combined with instant payments in a viable and scalable way, massive volumes could shift from cards to ACH. Cards will maintain a specific role in international, e-commerce, and travel and entertainment situa- tions, thanks to their unique capabilities (such as their global reach), but that may be no more than a quarter of payments. For the more “commodity” types of situations, cards’ key advan- tages—identifying a payer through the card, and the payment guarantee—could be replaced by new identifiers coupled with instant payments, an altogether different economic model. It remains yet to be seen how these alternative scenarios will play out.
Where to Go from Here If these developments happen, providers will need to keep an eye on a few “sweet spots” for driving revenue growth:
1. International payments. These should remain a profit generator for banks—thanks to as much as €21 billion in revenue per year—provided that global trade flows continue to flourish in turbulent times.
2. Omnichannel PSP. With cross-channel shopping finally picking up, PSPs with cross-channel capabilities will win both larger and smaller deals ahead of single-line e-commerce companies.
3. Face-to-face acquiring. There remains potential in equipping smaller merchants and new categories (beyond retail) with payment acceptance solutions. Cash displacement in face- to-face situations remains the single biggest growth area.
4. Instant payments and value-added services. If a provider can actively support merchants in matching linking payments with current accounts instantly and possibly offer additional services to them (based on data, loyalty), this could prove a key area.
Cashing In on Cashless Commerce 15 While frictionless commerce looms as a serious threat to the status quo, most likely the effects will be more muted than the biggest fears. On the other hand, they cannot be ignored. A seamless payments experience will become an increasingly important criterion when merchants choose payments providers. Access to end-customers and solution reach will remain relevant—but may not be enough anymore.
How the key factors play out—for example, how fast the acquiring market consolidates; what kind of investments are made in instant payments; how alternative payments shake out—will go a long way in deciding the winners and losers going forward. Importantly any player has a chance, banks remain empowered as the most natural custodian of money and thus a payment provider, PSPs flourish through online growth and proximity to merchants, and alternative players get turbocharged through PSD2 regulations.
Vision 2025: Payments Industry to Change Shape? The shift of power to users and billers, the demand for frictionless and likely emergence of new players will boost cash displacement and could lead to 6 percent annual growth in the number of electronic transactions in Europe through 2025. At the same time, increased competition will keep revenues at about half the growth rate, making life in the industry harder. Will the payments ecosystem as we know it be the same five years from now?
We project four target scenarios which may emerge, differing by degree of proliferation of solutions and dominance of providers (Figure 10).
Figure Future payment industry scenarios
Payment industry scenarios Consolidated ecosystem
• Banks and card schemes • Consumer magnets play a strong role leveraging (e.g. mobile OS, social existing card and ACH media platform) design market infrastructures frictionless experiences and • Infrastructure providers Established Global attract the bulk of payments upgrade and innovate with • Banks are pushed back in their networks (including structures front-ends the value chain instant payments, improved security, seamless payments)
Single-purpose solutions 2025 Multi-purpose solutions
• Alternative network providers • Payments as component (such as telco-provided and 5G) New Biller-driven of frictionless solutions add performant payment oered directly by billers messaging to their networks networks payment solutions • Retailers and IoT device • New technology (such as manufacturers create their distributed ledger) with new own banks/payment solutions providers substitute current card and ACH networks.
Fragmented ecosystem
ACH = Automated Clearing House (direct debits, credit transfers), IoT = Internet of Things Source: A.T. Kearney
Cashing In on Cashless Commerce 16 Established structures. The existing leaders could continue to lead if they manage to modernize the payments function quickly enough and establish new methods broadly in-country and across the region. P2P is a good anchor, as are online banking e-payments and wallets, but interoperability and scale in those are missing so far in most countries.
New networks. Telcos have gained so far in other parts of the world (such as Africa and Asia) but not yet in Europe, other than exceptions like Orange Cash. Technology upgrades (such as 5G telecommunication networks or the use of distributed ledger or blockchain technology) pose a serious risk to established infrastructures, and IoT could be a trigger for new players to set standards and attract payment flows. However there are no strong signs yet that this will become the “dominant” scenario in Europe.
Global front-ends. In this scenario, the emerging leaders would be those that aggregated the payment experience across billers and methods, using mobile as a control tower and employing a strategy built around the customer front-end. The potential here is huge, although data protection and the next wave of more cautious and skeptical customers, coupled with regulation, could limit the possibilities.
Retailer and biller solutions. This is a highly relevant area, as billers have a much wider issue to solve and payments are the key source of friction. The question here is whether the industry as it stands today (in the first two scenarios) develops better solutions and can embed them quickly enough. Otherwise, retailers and billers—including large global e-commerce players—will do it themselves.
Payments’ Rising Stakes Although the ultimate scenario and the time it will take to get there is not known yet, one thing remains clear: Seamless payments will be a requirement for any player seeking to win in a future marketplace marked by frictionless commerce. The stakes are rising. The time is now to prepare for the next step.
Authors
Stephen Whitehouse, Maciej Gawinecki, partner, London principal, Warsaw [email protected] [email protected]
Rik Goslinga, Philippe Menier, principal, Amsterdam associated director, Paris [email protected] [email protected]
Frederick Michna, consultant, Dusseldorf [email protected]
The authors wish to thank the European Digital Payments team for its support in the expert survey, and Ola Engebretsen, Joakim Karlsson, Teresa Epperson, and Kimberley Bella for their European and North American perspectives on seamless payments and frictionless commerce.
Cashing In on Cashless Commerce 17 A.T. Kearney is a leading global management consulting firm with offices in more than 40 countries. Since 1926, we have been trusted advisors to the world's foremost organizations. A.T. Kearney is a partner-owned firm, committed to helping clients achieve immediate impact and growing advantage on their most mission-critical issues. For more information, visit www.atkearney.com.
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