Advanced and Mobile Payments: What’S Stopping You? Contents

Advanced and mobile payments: what’s stopping you? Contents

1 introduction 2

2 WHAT IS AN ALTERNATIVE PAYMENT? 4

3 WHAT ARE BANKS’ PRIORITIES IN ALTERNATIVE PAYMENTS? 8

4 HOW MUCH ARE BANKS INVESTING IN ALTERNATIVE PAYMENTS? 11

5 RESPONDING TO THE STRATEGIC CHALLENGE 16

6 conclusion 21 1. Introduction

Advances in communications technology over recent years have led to an explosion of innovation in payments. Forget the replacement of cash and cheques by electronic payments; this is old news. Now early forms of electronic payment are being replaced by new.

Copyright © 2012 Oliver Wyman 2 We can now pay from our current account progress on alternative payments. using any device that can access the Or perhaps we have simply misjudged their internet, including mobile phones; we can responses. It is easier to see what banks now pay from e-wallets using the same devices; offer than what they are developing. we can pay by card using “Chip and PIN” or contactless technology; and we can pay To understand the situation better, from by the increasingly wide range of objects July to September 2012 Oliver Wyman onto which we can pre-load funds, including cooperated with Efma to conduct a survey cards, bracelets, key-rings and, again, of 148 banks in Europe, the Middle East and mobile phones. Africa (EMEA) and 10 from the rest of the world. This report summarises the findings This innovation presents a threat to banks. of that survey. Several of these new payment methods reduce the role that banks play in their It shows some variation between countries customers’ transactions. Consider non-bank but a reasonably consistent set of priorities, supplied e-wallets, for example. After funds with internet banking now so common that are initially transferred from a customer’s it is hardly regarded as “alternative” and with current account and into his or her e-wallet, mobile and contactless payments being the bank is out of the picture. It can neither the development priorities. Where banks collect transaction fees from payments hesitate to push innovative payments, it is made out of the e-wallet, nor observe the because, rightly or wrongly, they perceive an transactions. It loses the “information value” impasse created by mutual doubt. Merchants of handling the transactions. are reluctant to adopt the new technology because they fear consumers will not; How are banks responding to this threat? We consumers are reluctant to adopt it because fear they are showing insufficient urgency. they fear merchants won’t accept payments The term “alternative payments”, often used using it; and so banks are reluctant to invest to describe these innovations, may be partly in developing and promoting it. to blame. It wrongly suggests that they represent a niche market of little commercial The risk for banks is that someone else will value for mainstream banks. Or the sheer invest enough in technology and marketing speed and range of developments may be to get consumers and merchants over their crippling banks. And there may be genuine or doubts, end the impasse and further weaken perceived economic obstacles to more rapid banks’ hold on their customers.

What is familiar and unremarkable today was often an innovation just a few years ago, then used by only an adventurous few.

Copyright © 2012 Oliver Wyman 4 No one is now amazed to see someone speaking on a phone while walking down the street or listening to music through headphones while sitting on a bus. The same goes for making payments. In Europe “Chip and PIN” has gone from novel to old-hat in less than 10 years. Now it is contactless payment that creates the frisson of novelty. The speed with which new technology is adopted by increasingly savvy consumers is shortening the period during which payment methods are considered “alternative”.

Exhibit 1: What today counts as an alternative payment method

DEFINITION OF “ALTERNATIVE” DEFINITION OF “ALTERNATIVE” IN PHYSICAL PURCHASES IN ONLINE PURCHASES

Non-bank Mobile wallet (NFC)* payment account Online wallet Contactless card (non-traditional cards) Online wallet Mobile wallet (non-NFC) (traditional cards) Non-bank Mobile initiated/ payment account authorised

Closed loop Direct bank transfer merchant account

Alternative currency Closed loop merchant account

Direct bank transfer Alternative currency

-0.5 0 0.5 1.0 1.5 0 0.5 1.0 1.5 AVERAGE AGGREGATE SCORE AVERAGE AGGREGATE SCORE

*Near Field Communication Note: Aggregated Scores (Strongly agree = 2, Slightly agree = 1, Neither = 0, Slightly Disagree = -1, Strongly disagree = -2) Source: Oliver Wyman – Efma alternative payments survey; Oliver Wyman analysis Q1.1. /Q1.2. In the context of a customer purchasing goods at a physical store/online, to what extent do you regard the following payment methods as alternative? (N = 158)

Copyright © 2012 Oliver Wyman 5 Small lags in the adoption of technology can thus cause significant differences in what, on any given date, bankers in different countries regard as alternative payments. In 10 years, most of the payments methods in Exhibit 2 below and on next page will probably be considered standard in all the regions listed.

Exhibit 2: What counts as alternative, by region

GEOGRAPHIC SPLIT 2

Alternative 0

-2 Non-alternative

-1 Payment facilitated Payment using Payment facilitated via Payment using via a mobile wallet a contactless a mobile wallet (using a non-bank (payment cards via NFC) payment card another value source) payment account

Note: Aggregated Scores (Strongly agree = 2, Slightly agree = 1, Neither = 0, Slightly Disagree = -1, Strongly disagree = -2) Source: Oliver Wyman – Efma alternative payments survey; Oliver Wyman analysis Q1.1. In the context of a customer purchasing goods at a physical store, to what extent do you regard the following payment methods as alternative? (N = 158)

Copyright © 2012 Oliver Wyman 6 But, as of today, there are some notable national variations. For example, in the UK, where contactless card payments have been rolled out sooner than in most other countries, it doesn’t strike bankers as especially novel.

What counts as alternative, by region, continued...

GEOGRAPHIC SPLIT 2

1 UK & Ireland Nordics

0 France CEE & Benelux Balkans GSA -2 Middle East Iberia & Africa

-1 Mediterranean RoW Payment using a closed Payment using Payment using a loop merchant account an alternative currency direct bank transfer

Over the decades many technological innovations have failed to catch on and become conventional. We forget them because they are no longer here to be noticed. Payments are not exceptional in this regard. Some of today’s innovations in payments will surely fail to catch on, and some that do will later be superseded.

But we can observe where the banking industry is placing its bets. Most banks have already committed to some methods, such as internet banking payments. Other methods, such as mobile banking, have so far been developed by fewer banks but are in development at most of the rest (Exhibit 3).

Internet banking: servicing

Internet banking: payments Internet banking widely available Internet banking: e-commerce payments

SMS servicing Pay by SMS is niche SMS payments

Mobile banking: servicing via mobile optimised website Mobile banking: servicing via native app

Mobile banking: bill payments Mobile banking solutions are Mobile banking: third-party becoming common place, with payment (remote recipient) payment and POS solutions Mobile banking: servicing via generic app a major development priority Mobile banking: third-party payment (in proximity to recipients) Mobile banking: merchant payment (interfacing with POS) Mobile payment: merchant payment (no POS interface)

Contactless credit cards

Contactless debit cards

NFC using mobile SIM card Contactless, mobile NFC using micro SD card wallet and optical technology, while NFC using stickers/key fobs/ still rare, are a major bracelets etc development focus NFC (other)

Own branded mobile wallet Available now

Mobile optical technologies In development 0% 20% 40% 60% 80% 100% PROPORTION OF RESPONDENTS WITH THESE CAPABILITIES

Source: Oliver Wyman – Efma alternative payments survey; Oliver Wyman analysis Q2.1. Which of the following capabilities do you offer or plan to offer your customers? (N = 158)

Alternative payments are capturing a larger share of development spend year on year. This increasing investment should not be interpreted as a widespread strategic commitment to alternative payments however. On the contrary, most of the increased spend comes from those banks that are now lagging and wish to catch up with their peers.

Copyright © 2012 Oliver Wyman 11 The figures in Exhibit 3 showed what percentage of banks are developing various payment methods, not how much effort or investment they are putting into the task. To get an idea of this, we asked respondents to rate the level of investment being made in alternative payments. As shown in Exhibit 4, spend is relatively low but increasing, while Exhibit 5 shows that for most respondents their investment is aimed at keeping pace or catching up with their competitors.

This finding gels with what bankers say about what is not their reason in alternative payments: namely, retaining customers (see Exhibit 6). For familiar reasons that we will not repeat here, retail banking customers are very sticky.

Exhibit 4: Investment in alternative Exhibit 5: Banks’ commitment to payments investing in alternative payments

ALLOCATION OF DEVELOPMENT SPEND A TO ALTERNATIVE PAYMENTS OVER TIME INVESTMENT ATTITUDE % % 100 100 90 90 80 80 70 70 We are not investing in alternative 60 60 payments at this time 50 50 10%+ We are investing a little − this isn't 40 40 a priority for our organisation 30 5-10% 30 We are investing in order to keep 20 20 pace/catch up with our competitors 1-5% 10 10 We are investing heavily as it's 0 <1% 0 essential to our future business Last year This year Next year

Source (Exhibits 4 and 5): Oliver Wyman – Efma alternative payments survey; Oliver Wyman analysis Q3.1. How would you classify your investment approach to alternative payments? (N = 158) Q3.2. What percentage of development spend does alternative payments represent? (N = 158)

Copyright © 2012 Oliver Wyman 12 Once acquired, maximising revenue from them is the problem, not preventing them from switching to other banks: hence the top two reasons for investing in alternative payments (see Exhibit 6). This would justify banks’ “keep up with my competitors” approach if their competitors were only other banks. But it may well be misguided now that non-banks – online firms such as eBay and Google, mobile network operators, retailers and start-ups – are gaining ground in the payments market.

Exhibit 6: Reasons for investing in alternative payments

Win new customers

Build deeper relationships with our customers

To be distinct from our competitors

Increase revenues per customer

Keep pace with our competitors

Reduce costs

Learn through R&D

Retain customers 0%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Source: Oliver Wyman – Efma alternative payments survey; Oliver Wyman analysis Q3.3. What were the main reasons for investing in alternative payments? (N = 158)

Copyright © 2012 Oliver Wyman 13 Customers may not switch their current account to a new bank in search of superior payments provision, but if they switch to making payments through non-bank channels, banks may still lose extremely valuable business and information. The generally modest, if growing, investment in alternative payments is also motivated by what many banks perceive to be a kind of stand- off between consumers and merchants. Consumers are reluctant to adopt new payments technology unless they believe it will be accepted by most merchants, and merchants are reluctant to adopt technology that has low levels of consumer usage (see Exhibits 7 and 8).

Exhibit 7: Barriers to adoption – the consumer’s point of view (as perceived by bankers)

NUMBER OF RESPONSES RECEIVED 100 90 80 70 60 50 40 30 Rank 3 20 Rank 2 10

0 Rank 1 Inertia Lack of Lack of to set up awareness acceptance bureaucracy Complexity/ Inconsistent Another thing Low merchant Low Security issues new technology formats/devices financial incentives Uncomfortable with

Source: Oliver Wyman – Efma alternative payments survey; Oliver Wyman analysis Q5.1. What do you consider the primary barriers to greater adoption of alternative payments from a customer’s perspective? (N = 158)

Copyright © 2012 Oliver Wyman 14 To end this stand-off, banks must invest not only in developing the technology but make it available at low or no cost to their customers alongside effective marketing. But why should they when retail bank customers are sticky and banks have always dominated the payments market? The answer, of course, is that banks no longer have the payments field to themselves. Retailers, mobile phone providers and technology firms are all positioning for a share of the market alongside a number of new start-ups.

Exhibit 8: Barriers to adoption – the merchant’s point of view (as perceived by bankers)

NUMBER OF RESPONSES RECEIVED 120

100

40 Rank 3

20 Rank 2

0 Rank 1 Uncertainty Benefits of High Lack of Multiple Security regarding acceptance cost of standards competing issues customer uncertain/ implementation propostions adoption unclear

Source: Oliver Wyman – Efma alternative payments survey; Oliver Wyman analysis Q5.2. What do you consider the primary barriers to greater adoption of alternative payments from a merchant’s perspective? (N = 158)

We suspect many banks are not sufficiently engaged with the challenges presented by the rapid evolution of payments technology. This lack of engagement may be the result of – or, at least, reflected by – the organisation of payments development work within the bank. Having divided our respondents into Leaders and Followers, we found that the leaders have more often established new, dedicated teams for the task (see Exhibit 9).

Exhibit 9: Organisation of alternative payments development

MANAGING ALTERNATIVE PAYMENTS PER STRUCTURE % % 45 45

40 40

35 35

30 30

25 25

20 20

15 15

10 10 Leaders 5 5

0 0 Followers m m m m m m m m m m a a a a a a a a a a e e e e e e e e e e t t t t t t t t t t

l l r r y y d d a a e e g g t e t e & D & D h h e e n n t t t t R R s h s h e e i i a a O O l l r r m m t t b b t t s s a a r r / / a a s t s t n n p p o o e e i i y - e t y - e t l l l l a a s - d s - d a v a v i i s s o o c c n n e r o e r o n n C C I I S p S p

Note: Leaders are defined as companies which invest to be distinct from the competition, and represent 54 out of the 158 respondents Source: Oliver Wyman – Efma alternative payments survey; Oliver Wyman analysis Q4.1. How are you organised to address opportunities in alternative payments? (N = 158)

Copyright © 2012 Oliver Wyman 17 Just how great a threat or opportunity payments innovation poses for any bank depends on the market context and its mix of customers and business. Our respondents believe the main beneficiaries, aside from customers, will be payment card networks and the biggest losers will be current account providers: namely, banks themselves.

Exhibit 10: Expected winners and losers

TOP 3 EXPECTED TO BENEFIT MOST TOP 3 EXPECTED TO BENEFIT LEAST % % 90 90

80 80

70 70

60 60

50 50

40 40

30 30 Rank 3 20 20 Rank 2 10 10

0 0 Rank 1 Customers Payment Mobile Current POS Payment card network account unit card networks operators providers manufacturers issuers

Source: Oliver Wyman – Efma alternative payments survey; Oliver Wyman analysis Q5.4. Who do you think will gain the most/least from alternative payment innovation in the next 5 years? (N = 158)

Copyright © 2012 Oliver Wyman 18 Payments businesses within banks have traditionally been run as mature businesses that deliver stable returns, taking advantage of established technology and scale. As such they have often been ignored by senior management and have received little investment in recent years, relying on legacy platforms and conservative thinking.

With the continuous innovation in payment methods, the easy way to compete is to simply bolt on new layers of capability to legacy platforms. However this is a short term fix that stores up problems for a later date, and is often more costly in the long run.

New payment methods and competitors are expected to undermine current margins on payment processing. By delaying upgrades to their core systems until a later date, banks may find that the business case for new investment is no longer sound in a market operating on thinner margin and lower volume expectations. It’s also important for banks to consider the degree to which alternative payments are truly innovative and present a disruptive force to the status quo by changing the dynamics of the payment ecosystem.

For example , consider the current environment that facilitates credit card payments. For a customer to pay a merchant using a credit card, this requires an account with a bank, a credit card account from a credit card issuer, and a device to interface with the merchant – typically using the physical card operating under the rules of a particular card scheme. For a merchant to receive a card payment, this typically requires another device, the familiar card terminal, a merchant account with an acquirer (who processes the payment and ultimately settles with the merchant less any applicable fees), and a bank account.

Copyright © 2012 Oliver Wyman 19 Alternative payments could represent a change to how the credit card payment is made within this ecosystem (e.g. using a contactless card and reader as an alternative interface), add a new layer to the ecosystem (e.g. a customer using a payment app on their smart phone, or a merchant using an app on a tablet computer), or bypass layers within the ecosystem, negating the use of a credit card and the supporting infrastructure (e.g. using the interbank clearing system to facilitate direct settlement between the customer and merchant bank accounts). Each payment innovation has the potential to change the status quo in subtle, but significant ways, and therefore requires careful scrutiny to understand its importance.

Ex hibit 11: Alternative payments HAVE THE POTENTIAL TO BE DISRUPTIVE

APPS (Software) INTERNET APPS (Software)

DEVICES MAGNETIC STRIPE, CHIP DEVICES (Hardware) CONTACTLESS (Hardware)

ISSUERS CARD SCHEMES ACQUIRERS

Alternative payment BANKS DIRECT SETTLEMENT BANKS opportunities

Face to face credit card CUSTOMER MERCHANT transaction flow (simplified)

Note: Indicative representation of the process and alternatives. Not exhaustive.

Banks are now at risk of being outmanoeuvred by more nimble, non-bank competitors with modern technology, focused on making alternative payments a mainstream business. Even if banks decide not to push hard in the alternative payments space, this should be a considered, strategic decision. To make it, senior managers need to answer the following questions: •• What disruptive threats exist in our market place? •• Who is expected to win and lose in our market? How can we influence the outcome? •• Is our alternative payment investment schedule comparable with our peers and consistent with our aspirations? •• How are we organised internally to tackle alternative payments? Is the topic receiving sufficient focus to be successful?

Copyright © 2012 Oliver Wyman 22 Oliver Wyman is a global leader in management consulting that As a global not-for-profit organisation, Efma brings together more combines deep industry knowledge with specialised expertise in than 3,300 retail financial services companies from over 130 strategy, operations, risk management, organisational countries. With a membership base consisting of almost a third of transformation, and leadership development. all large retail banks worldwide, Efma has proven to be a valuable resource for the global industry, offering members exclusive access For more information please contact the marketing department to a multitude of resources, databases, studies, articles, news by email at [email protected] or by phone at one of the feeds and publications. Efma also provides numerous networking following locations: opportunities through working groups, online communities and international meetings. EMEA For more information: www.efma.com or [email protected] +44 20 7333 8333

AmericaS Author +1 212 541 8100 James Sherwin-Smith is a Senior Manager within the Payments practice at Oliver Wyman, based in our London office. Asia Pacific [email protected] +65 6510 9700

www.oliverwyman.com

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