Opinion Paper on Next Generation Alternative Retail Payments: User Requirements EBA Working Group on Electronic Alternative Payments Version 1.0 13th May 2014 CONTENTS INTRODUCTION 3 OVERVIEW 3 DRIVERS FOR CHANGE IN RETAIL PAYMENTS 4 SEGMENTATION OF ALTERNATIVE PAYMENT SOLUTIONS – CASE STUDIES 4 CONSUMER AND MERCHANT REQUIREMENTS 6 SOME DESIGN CAVEATS 7 FAST FORWARD – THE 2020 USER EXPERIENCE 7 BANK WINNERS AND LOSERS 9 E-AP – SEVEN CHALLENGES FOR EBA MEMBERS 9 RESEARCH REFERENCES 10 GLOSSARY OF TERMS 11 Copyright © 2014 Euro Banking Association (EBA) professional advice. The views expressed are those of the members of the EBA Working Group on Electronic Alterna- All rights reserved. Brief excerpts may be reproduced for tive Payments and not necessarily the views of the EBA. non-commercial purposes, with an acknowledgement of EBA or its affiliates do not accept any liability whatsoever the source. arising from any alleged consequences or damages arising from the use or application of the information and give no The information contained in this document is provided for warranties of any kind in relation to the information provided. information purposes only and should not be construed as layout: www.quadratpunkt.de photo credit: © fotolia.com / Dreaming Andy, cirquedesprit 2 EURO BANKING ASSOCIATION: Opinion Paper on Next Generation Alternative Retail Payment (e-AP) User Requirements INTRODUCTION OVERVIEW In 2013, the EBA set up a Working Group with a brief Banking professionals now almost universally recog- to help the Board and members to gain a deeper nise that retail payments are undergoing significant understanding of the changing structure of retail pay- and rapid changes. However, many may ask why ments and its impact on traditional cash, cards and should banks specifically focus on Alternative Pay- ACH payments. With the help of external consultants, ments (e-AP) rather than traditional cash, cards and the Working Group developed an extensive archive ACH payments? The answer is relatively simple. Tra- of research materials and also delivered several ditional payment methods have been under attack reports to the Board which have helped shape EBA’s since the invention of PayPal, one of the first e-APs vision for payments in 2020. The most important mes- and one of the most successful non-bank payments sage, from these studies, was that new players in the innovations. PayPal delivered where bank cards and payments business have potential to disrupt existing other forms of payment have not – in the e-commerce business models and to significantly disintermediate sector. Many others have followed, to such a degree banks through alternative payments (e-AP) products. that worldwide, there are now several hundred alter- As a result, a second Working Group was formed in native e-AP payments methods, many of which op- early 2014, commissioned to define more clearly the erate in the EU. changing needs of the retail payments market from Alternative Payments and to recommend how EBA member banks should react. Figure 1: Drivers for change After all, banks have built their own alternatives, such yes. There are longer term implications from the non- as iDEAL via the major Dutch banks and MyBank via bank expansion of e-AP, which the Working Group EBA CLEARING. In addition, the underlying funding believes EBA members need to seriously consider. of most e-APs is through the SCT and the SDD. So, This paper seeks to clarify and explain this rationale. need banks be really concerned? Well, the answer is 3 EURO BANKING ASSOCIATION: Opinion Paper on Next Generation Alternative Retail Payment (e-AP) User Requirements DRIVERS FOR CHANGE IN RETAIL from cards and more directly towards the bank PAYMENTS account, allowing non-bank providers access to the account and greater customer choice. (1,2) What factors are causing the growing impact of e-AP on traditional methods of payment and cards particu- 4 Search for new business models: Enabling larly? The current “Drivers for Change” are numerous new/alternative forms of payment has crea- and are particularly disruptive for incumbent issuers, ted a need for new business and commercial acquirers and interbank payments processors. The models. Valuable consumer behaviour data can most important drivers for change can be summarised be captured from mobile payments linked to as follows (see Figure 1): mobile point-of-sales (mPOS). Furthermore, many retailers recognise the need to ‘own’ the payment 4 Growth of new channels and acceptance: There space and deflect relationship capture by mobile has been a rapid expansion of new payment network operators (MNO) and players such as channels and devices over the past ten years, Apple, Google and Facebook. Old models are including online/e-commerce, mobile, tablets and being challenged and there is a drive to create person-to-person. Many of these new channels new structures. cannot easily be supported by traditional Automat- ed Clearing House (ACH) and card payment 4 Pressure to increase security: Consumers, methods. In addition, new methods of acceptance merchants, key industry stakeholders are are needed to support contactless, Near Field demanding improved security for payment trans- Communication (NFC), Quick Response codes actions. This has driven mandates such as 3D (QR Code) and Bluetooth Low Energy (BLE). Secure, Payments Card Industry Security Stand- ard (PCI DSS) to protect citizens and remove 4 Consumer behaviour change: New customer data compromises. Security initiatives continue behaviours have generated change. Greater use to generate substantial change with tokenisation of smartphones, tablets and e-wallets, increas- and host card emulation (HCE) as the latest inno- ing use of social media, and a consumer expec- vations. (3) tation of instant, secure and simple methods of payment mean that traditional channels are less 4 Demand for multi-channel platforms: Silo- and less aligned to user needs. based payments platforms are rapidly becoming obsolete and not fit for purpose. For example, the 4 New merchant demands: Merchants are react- traditional, queue-to-pay, is no longer acceptable ing to customer change and want to build omni- for many shoppers (although still tolerated) and channel offers which require new and differ- cumbersome remote systems are continually ent payments platforms able to support multi- challenged by consumers’ demands for one-click, country operations. seamless processes. The traditional dual choice of physical cash or cards in store is no longer 4 Drive for integration: Payments are becoming sufficient. Consumers want to pay at home, on increasingly integrated into the customer journey the move and in store and merchants want com- and becoming a core pillar of many merchant mon processes and platforms. offers. The advent of tablet/mobile based systems linked to sophisticated loyalty offers are best in class examples of integrated offers. SEGMENTATION OF ALTERNATIVE PAYMENT SOLUTIONS – CASE STUDIES 4 Impact of regulation: Regulatory interven- tions and fee caps are gradually changing the The drivers described above mean that the require- balance between cards, and other forms of ments for retail payment options are rapidly and payment. The cards business case has been continuously changing. Although cash remains challenged and somewhat weakened. Merchants the payment method mostly used and cards are want even lower fees and this has incen- the preferred electronic option, more than 200 in- tivised the use of low cost alternatives. In ternational e-AP solutions have been identified by 4 addition, PSD2 supports diversification away WorldPay. ( ) Some show very strong growth, and 4 EURO BANKING ASSOCIATION: Opinion Paper on Next Generation Alternative Retail Payment (e-AP) User Requirements several have reached critical mass and are now The following summary of case studies provides mainstream offers that compete strongly with cards. details of successful e-AP payment methods. To date most e-APs have been developed by non- e-AP solutions have been broken down into eight bank providers, who are unconstrained by the legacy segments, as follows (see Figure 2): systems of banks and have innovated, building solu- tions that fill the “inconvenience gaps” in traditional payments methods. Figure 2: e-AP method segmentation 4 Buyers and Sellers Payments (e.g. PayPal): 4 Non-Bank and Anonymous Payments (e.g. PayPal originated the first, most known and Paysafecard): This e-AP example enables con- quintessential e-AP, which enabled an online sumers to convert cash to electronic value using guaranteed payments link between Ebay auction pre-numbered vouchers, sold at the POS, which site buyers and sellers who do not know each can be entered online and used for e-commerce other. Card acquiring for auction sellers proved transactions. Such products are mostly utilised by too complex, and thus banks have lost as much the un- or underbanked and are also used as 25 percent of e-commerce turnover in several anonymously for gambling and gaming. No EU markets. Paypal is now moving into face- bank-led, credible alternatives have been identi- to-face at the POS (see PayPal’s pilot in the UK). fied so far. (5) PayPal also invented the original ‘wallet’ con- cept with ACH funding backed up by card top-up. 5 EURO BANKING ASSOCIATION: Opinion Paper on Next Generation Alternative Retail Payment (e-AP) User Requirements 4 Low Cost POS Acceptance (e.g. ELV): For 4 Person-to-person (P2P) payment schemes almost 20 years the German market has pio- (e.g. Pingit, Zapp, Paym and Swish): Finally, neered a unique Direct Debit ACH based, sophis- and by no means last, there has been an ac- ticated e-AP called ELV at the POS. ELV gener- celerating launch of mobile based, bank P2P offers ates over 1.5bn transactions per annum and also over the past two years. In addition, there are offers authorisation and payments guarantee several telco/non-bank supported services also in options matching card functionality.