Volume 8, Number 22 October 2015 McKinsey on Payments

Foreword 1

Payments in Asia: At the vanguard of digital innovation 3 Digitization of business processes and the emergence of new platforms for payments and finance bring both challenges and opportunities to payments businesses operating within Asia or serving clients who trade with Asia.

Supply-chain finance: The emergence of a new competitive landscape 10 Fintechs are changing how buyers and suppliers think about the supply-chain finance market, and starting to command a sizeable proportion of the value pool.

16 in 2016: Trailblazing trends in global payments 17 A look at the topics that are top of mind for global payments executives, from EMV migration to the battle for the “digital customer.”

Digital wallets in the U.S.: Minding the consumer adoption curve 26 Digital wallets seem poised to enter the mainstream. Now is the time for providers to identify which strategic market approaches will lead to success.

The new rules for growth through customer engagement 32 For banks, digital engagement with customers has become an imperative for preserving relationships. Five rules can help them thrive in the digital landscape.

No time for U.S. bank complacency over liquidity compliance 39 Basel III’s liquidity coverage ratio is no cause for panic for U.S. commercial banks. However, banks should not wait to define their strategic approach to the regulation.

The Singapore payments industry at a glance 46 26 McKinsey on Payments October 2015

Digital wallets in the U.S.: Minding the consumer adoption curve

Digital wallets have been slow to capture consumer attention, but finally seem poised to enter the U.S. mainstream. For would-be players, then, the key questions are: How fast will consumers adopt digital wallet products, and how is the market likely to unfold? The answers, of course, depend on the nature of the products offered and consumers’ willingness to adopt them. This article provides insight into the market-entry process by exploring how the consumer adoption curve relates to mobile payments technology.

Jocelene Kwan To better understand how that curve will Android Pay, MasterPass and Visa Check- likely work for digital wallets, McKinsey out), product launches (, Citi Wal- Marie-Claude Nadeau turned to advanced data analytics and other let) and acquisitions (LoopPay by Samsung Jon Steitz sophisticated tools to understand how con- and by Google). On the consumer sumers think and feel about mobile pay- side, however, progress has been relatively ments products in the U.S. The findings of slow, with mobile payments still represent- this research identify several relevant mar- ing less than 2 percent of consumer spend- ket segments and reveal how each integrates ing. Even market participants like PayPal, with the consumer adoption process. This who have achieved higher online market insight can be a useful aid in developing shares, are still struggling to make progress more effective market-entry strategies for a in the broader pool of in-store purchasing. diverse range of potential market entrants, Popular peer-to-peer (P2P) services, such as and provides learnings that can also be ap- (or PingIt and MobilePay in Europe) plied across other geographies. have also made little headway in this arena.

How fast will the digital wallets All this prompts the question: Will con- market grow? sumers ultimately adopt digital wallets on a Recent activity by mobile wallet providers in widespread basis, and if so, when and at the U.S. has grown considerably. Chief what rate? Recent research suggests that mo- among these activities are product an- bile payments will approach 9 percent of nouncements (, Chase Wallet, consumer spending by 2020, with certain Digital wallets: Minding the consumer adoption curve 27

consumer segments leading that advance. drew on data from other digital wallet intro- Most of the early volume will probably occur ductions, including the Starbucks smart- in online and mobile payments, rather than phone app, M-Pesa (Kenya) and in point-of-sale (POS) transactions. In fact, (China), as well as on data related to proba- almost half of e-commerce volume already ble U.S. market drivers, such as e-commerce flows through stored credentials—either dig- and smartphone penetration levels. Based on ital wallets or cards on file. Such findings the projections of these models and other re- suggest that digital wallet providers will need search findings, McKinsey estimates that ap- to offer value propositions that are com- proximately $200 billion in transactions are pelling to specific market segments that can, already flowing through digital wallets in the in turn, ignite more widespread adoption. U.S. And the base-case scenario indicates To estimate the potential for digital wallet this volume should reach 18 million transac- adoption in the U.S. during the next five tions by 2020, or a total of $1.2 trillion. This years, McKinsey employed predictive analyt- represents about 18 to 20 percent of total ics technology in conjunction with data mod- U.S. retail spending. Approximately $1 tril- els aimed at estimating the growth potential lion of that will come from mobile and e- under various market scenarios. The models commerce transactions (Exhibit 1).

Exhibit 1 Digital wallets in the U.S.: Value of payments CAGR $ trillion, 2015-2020 Percent Mobile and online 1.2 payments will drive 0 ~60% Point of sale digital wallets ~40% Peer to peer 0.2 adoption ~40% Online 0.9 0 ~50% Mobile 0.1

0.7 0 0.6

0.1 0.5 0.5 0

0.1 0.4 0.3 0

0 0.3 0.2 0 0 0.2 0.4 0 0.3 0.1 0.2 0.2 0.1 0.1

Source: CrowdANALYTIX 2015; McKinsey analysis 2015 2016F 2017F 2018F 2019F 2020F 28 McKinsey on Payments October 2015

Digital wallet defined

The term digital wallet has been loosely used in reference to a diverse range of financial services, products and technologies. For clarity, McKinsey defines a digital wallet as software that enables consumers to conveniently store various types of payments credentials, such as information about credit and debit cards, bank accounts, and prepaid or gift cards. Wallet owners can then use their stored credentials to digitally pay various parties and merchants for transactions being made online or with their mobile device at brick-and-mortar merchants equipped with NFC terminals; and they can even make peer-to-peer money transfers.

While the base case conservatively projects consumer segments and product attributes in-store mobile wallet transactions will will most likely drive growth, and designing reach $50 billion by 2020, some scenarios relevant entry strategies. To address these forecast significantly greater volumes. The questions, McKinsey turned to its latest most critical factor will be the ability to at- Global Mobile Payments consumer survey, a tain broad merchant acceptance and the study of 1,000 consumers that is designed to merchants’ willingness to offer consumers segment markets based on consumers’ needs sufficient incentives to motivate substantial and attitudes regarding mobile payments digital wallet use, as Starbucks succeeded in and digital wallets. Needs-based segmenta- doing. Historically, merchant reluctance to tion helps identify which product attributes accept new payments forms resulted from will probably drive consumer decisions in se- unclear adoption incentives and the high lected target markets, enabling marketers to cost of altering POS infrastructures. But re- design compelling value propositions that cent projections show that high adoption align with segment needs. Needs-based seg- rates by brick-and-mortar merchants, as mentation is often a stronger indicator of Starbucks licensees demonstrated, could consumers’ near-term decisions than demo- create a four-fold increase in digital wallet graphic data and behavior-based segmenta- use, reaching $200 billion by 2020. Because tion. This is an important distinction for the U.S. market is in the early stages of mo- rapidly growing market categories such as bile wallet use at retail, it is difficult to pre- digital wallets (Exhibit 2). dict whether this accelerated growth will Consumer segment 1: Mobile occur across the broader marketplace. enthusiasts Who will adopt digital wallets, and People in this segment tend to be early when? adopters of mobile wallets. They enjoy try- Anticipating substantial growth of digital ing new things with their mobile phones, wallets in the U.S. might be unsurprising in including making payments. If they have light of the increase of activity noted earlier. concerns about security or are interested in However, marketplace success still demands promotional offers, the concerns are typi- that participants better understand which cally minor. More important are conven- Digital wallets: Minding the consumer adoption curve 29

ience and the prospect of being able to they’re the wealthiest consumer segment, leave their wallets and cards at home. As with 28 percent reporting household income the youngest group in survey (47 percent greater than $100,000. But getting a deal are under the age of 35), mobile enthusiasts makes them feel good. They are somewhat value traditional credit card attributes, in- more skeptical about digital wallets and mo- cluding fraud alerts, low interest rates and bile payments than mobile enthusiasts, but high credit limits. Product attributes likely nonetheless will likely adopt them within the to attract this segment include a seamless next few years. This group prefers wallet of- mobile payments experience coupled with ferings that integrate loyalty programs with intuitive new features and interfaces. A rewards for supporting specific merchants, compelling wallet offering might integrate or with spending in certain categories. merchant and peer payments, as well as a Segment 3: Bank loyalists storage capability for personal credentials, such as a driver’s license. Members of this segment focus on carefully managing their finances. Beyond that, they Segment 2: Deal hunters are generally ambivalent about digital wal- Deal hunters seek promotional offers, re- lets, preferring to use debit cards and other wards and discounts. Their primary motiva- bank-focused payments solutions. These tion is not necessarily budget constraints; middle-income consumers consider deal-

Exhibit 2 Mobile Deal Bank Security Budget In digital payments, enthusiasts hunters loyalists skeptics conscious consumer segments Key defining attitudes Like faster, Love rewards Like bank-focused Conerned about Have no interest simpler ways to and loyalty wallets, avoid privacy and in mobile differ significantly make purchases programs credit cards technical reliability payments

Percent of U.S. 26% 24% 17% 16% 17% consumers

Percent greater than 12% 7% 15% 34% 31% 65 years old

Percent less than 47% 32% 32% 15% 20% 35 years old

Household income 18% 28% 15% 18% 16% greater than $100,000

Household income 15% 23% 25% 25% 31% less than $25,000

Percentage that use 73% 73% 66% 47% 54% smartphones

Self-described “early 17% 5% 7% 3% 1% adopters” of mobile payments

Self-described 6% 6% 18% 39% 30% “resistant” users of Source: McKinsey Global Mobile Payments mobile payments Consumer Survey, 2014-2015 30 McKinsey on Payments October 2015

focused wallets and offers as bothersome will avoid any form of mobile payments un- distractions. Bank-focused wallets that facil- less these concerns are addressed. itate tracking of account balances and ex- Segment 5: Budget conscious pense management will therefore have the strongest appeal. Like bank loyalists, the budget conscious segment is function-centered. Its members Segment 4: Security skeptics employ various payments methods to man- These consumers are highly concerned age their modest budgets. They comprise about privacy and product reliability. They the lowest-income group, with 31 percent are less inclined than others to own a smart- reporting household incomes of $25,000 or phone or even have a mobile device with In- less. The budget conscious also have the ternet access. Security skeptics are also the lowest mobile-payments adoption rate. most mature segment (34 percent are 65 or They are also deal seekers (38 percent are older). Their skepticism means they are the interested in deal-centered wallet offer- most likely to resist digital wallets. Forty ings), although they are motivated more by percent say they have no interest in mobile their need to manage limited resources payments. Identity theft and security are than by the thrill of the chase. Wallets likely prime concerns for these consumers, who to entice this segment will offer cash back

Exhibit 3 Highest-priority features, by segment Appeal of digital wallet attributes Segment varies by segment Mobile Deal Bank Security Budget enthusiasts hunters loyalists skeptics conscious Product features

Rewards

Loyalty programs

Identification

Peer-to-peer transfers

In-person retail (POS)

Social connectivity

IT reliability

Technical performance

Mobile banking and bill pay

Low interest borrowing/credit

Speed/ease of “check-out”

Source: McKinsey Global Mobile Payments Digital goods Consumer Survey, 2014-2015 Digital wallets: Minding the consumer adoption curve 31

or deliver other forms of significant con- might need to invest in features and infra- sumer value. structure that enhance the shopping experi- ence and offer meaningful rewards. These Developing an effective multiphase might be partnerships with merchant or marketing strategy credit card loyalty programs, integration Understanding how each consumer segment with POS infrastructure to enable automatic prioritizes its needs will enable digital wallet redemption or pay-with-points features, as participants to tailor their marketing strate- well as continuous sourcing of compelling gies and offerings to maximize adoption and merchant offers. usage (Exhibit 3). However, given the limited size of individual market segments, winning * * * widespread product adoption could require Although consumer trends are difficult to designing products that will appeal to multi- predict, in the U.S. digital wallets seem ple segments. More specifically, wallets will ready to move onto the fast track. So now is need to include more than just basic pay- the time for current and would-be partici- ments capabilities, and offer convenience- pants in this potentially vast arena to iden- centered value propositions, which are fast tify which strategic market approaches are becoming table stakes. Being device-centered likely to maximize their chances for success. products, Apple Pay and Android Pay, for ex- McKinsey’s research and observation of digi- ample, attract mostly mobile enthusiasts. tal wallets and other leading-edge payments Other product attribute options include fi- approaches around the globe strongly sug- nancial management and control capabilities gest that a consumer-needs market segmen- that might appeal to the bank loyalist seg- tation strategy should be a major focus for ment, or rewards and loyalty program links all types of players. The segments identified to pursue the deal hunter segment. here are based on research findings for U.S. consumers, and consumer needs and finan- Players who target bank loyalists will need cial habits certainly differ from market to to leverage or build deep trust with their market; however, experience suggests that a customers, and motivate them to migrate similar needs-based approach offers the best from bank cards to digital wallets. Adapting opportunity for long-term success regardless current card benefits, such as credit and of the target market. spending controls to digital wallets could fa- cilitate this transition. This approach might also include offering credit within wallets, or Jocelene Kwan is a consultant, Marie-Claude partnering with banks to integrate such an Nadeau is an associate principal and Jonathan offering. On the other hand, those who de- Steitz is a principal, all in the San Francisco office. cide to pursue the deal hunter segment