ADVANCED AND MOBILE PAYMENTS: WHAT’S STOPPING YOU?€¦ · retail banking customers are very...
Transcript of ADVANCED AND MOBILE PAYMENTS: WHAT’S STOPPING YOU?€¦ · retail banking customers are very...
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
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.
1. INTRODUCTION
Copyright © 2013 Oliver Wyman 2
We can now pay from our current account
using any device that can access the
internet, including mobile phones; we can
pay from e-wallets using the same devices;
we can pay by card using “Chip and PIN”
or contactless technology; and we can pay
by the increasingly wide range of objects
onto which we can pre-load funds, including
cards, bracelets, key-rings and, again,
mobile phones.
This innovation presents a threat to banks.
Several of these new payment methods
reduce the role that banks play in their
customers’ transactions. Consider non-bank
supplied e-wallets, for example. After funds
are initially transferred from a customer’s
current account and into his or her e-wallet,
the bank is out of the picture. It can neither
collect transaction fees from payments
made out of the e-wallet, nor observe the
transactions. It loses the “information value”
of handling the transactions.
How are banks responding to this threat? We
fear they are showing insufficient urgency.
The term “alternative payments”, often used
to describe these innovations, may be partly
to blame. It wrongly suggests that they
represent a niche market of little commercial
value for mainstream banks. Or the sheer
speed and range of developments may be
crippling banks. And there may be genuine or
perceived economic obstacles to more rapid
progress on alternative payments.
Or perhaps we have simply misjudged their
responses. It is easier to see what banks now
offer than what they are developing.
To understand the situation better, from
July to September 2012 Oliver Wyman
cooperated with Efma to conduct a survey
of 148 banks in Europe, the Middle East and
Africa (EMEA) and 10 from the rest of the
world. This report summarises the findings
of that survey.
It shows some variation between countries
but a reasonably consistent set of priorities,
with internet banking now so common that
it is hardly regarded as “alternative” and with
mobile and contactless payments being
the development priorities. Where banks
hesitate to push innovative payments, it is
because, rightly or wrongly, they perceive an
impasse created by mutual doubt. Merchants
are reluctant to adopt the new technology
because they fear consumers will not;
consumers are reluctant to adopt it because
they fear merchants won’t accept payments
using it; and so banks are reluctant to invest
in developing and promoting it.
The risk for banks is that someone else will
invest enough in technology and marketing
to get consumers and merchants over their
doubts, end the impasse and further weaken
banks’ hold on their customers.
Copyright © 2013 Oliver Wyman 3
2. WHAT IS AN ALTERNATIVE PAYMENT?
What is familiar and unremarkable today was often
an innovation just a few years ago, then used by
only an adventurous few.
Copyright © 2013 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
1.51.00.5-0.5
AVERAGE AGGREGATE SCORE
0 1.51.00.5
Contactless cardOnline wallet
(non-traditional cards)
Non-bank payment account
Mobile initiated/authorised
Mobile wallet (NFC)*Non-bank
payment account
Mobile wallet (non-NFC)Online wallet
(traditional cards)
Closed loopmerchant account
Direct bank transfer
Alternative currencyClosed loop
merchant account
Direct bank transfer Alternative currency
AVERAGE AGGREGATE SCORE
0
DEFINITION OF “ALTERNATIVE”IN PHYSICAL PURCHASES
DEFINITION OF “ALTERNATIVE” IN ONLINE PURCHASES
*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 © 2013 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
Payment facilitated via a mobile wallet
(payment cards via NFC)
Payment using a contactless payment card
Payment facilitated via a mobile wallet (using another value source)
Payment using a non-bank
payment account
No
n-a
lte
rna
tiv
eA
lte
rna
tiv
e
0
1
2
-1
-2
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 © 2013 Oliver Wyman 6
WHAT COUNTS AS ALTERNATIVE, BY REGION, CONTINUED...
GEOGRAPHIC SPLIT
Payment using a closedloop merchant account
Payment using an alternative currency
Payment using a direct bank transfer
0
1
2
-1
-2
RoW
Middle East & Africa
Balkans
CEE
Nordics
Mediterranean
Iberia
GSA
France & Benelux
UK & Ireland
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.
Copyright © 2013 Oliver Wyman 7
3. WHAT ARE BANKS’ PRIORITIES IN ALTERNATIVE PAYMENTS?
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.
Copyright © 2013 Oliver Wyman 8
Given the pace of change in communications technology, it would require more courage
than we possess to predict which of the current payments innovations will survive.
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).
Copyright © 2013 Oliver Wyman 9
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)
EXHIBIT 3: ALTERNATIVE PAYMENTS OFFERED AND IN DEVELOPMENT
100%80%60%40%20%
PROPORTION OF RESPONDENTSWITH THESE CAPABILITIES
0%
Internet banking: servicing
Internet banking: payments
Internet banking:e-commerce payments
SMS servicing
SMS payments
Mobile banking: servicing viamobile optimised website
Mobile banking: servicing via native app
Mobile banking: bill payments
Mobile banking: third-partypayment (remote recipient)
Mobile banking: servicing via generic app
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
NFC using micro SD card
NFC using stickers/key fobs/bracelets etc
NFC (other)
Own branded mobile wallet
Mobile optical technologies
Available now
In development
Internet banking widely available
Pay by SMS is niche
Mobile banking solutions are becoming common place, with payment and POS solutions a major development priority
Contactless, mobile wallet and optical technology, while still rare, are a major development focus
Copyright © 2013 Oliver Wyman 10
4. HOW MUCH ARE BANKS INVESTING IN ALTERNATIVE PAYMENTS?
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 © 2013 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
PAYMENTS
40
30
20
10
50
80
60
90
100
70
ALLOCATION OF DEVELOPMENT SPEND TO ALTERNATIVE PAYMENTS OVER TIME
Last year This year Next year
<1%
1-5%
5-10%
10%+
%
0
EXHIBIT 5: BANKS’ COMMITMENT TO
INVESTING IN ALTERNATIVE PAYMENTS
40
30
20
10
50
80
60
90
100
70
We are investing in order to keep pace/catch up with our competitors
We are investing heavily as it's essential to our future business
We are not investing in alternative payments at this time
We are investing a little − this isn't a priority for our organisation
A INVESTMENT ATTITUDE
%
0
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 © 2013 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.
Source: Oliver Wyman – Efma alternative payments survey; Oliver Wyman analysis
Q3.3. What were the main reasons for investing in alternative payments? (N = 158)
EXHIBIT 6: REASONS FOR INVESTING IN ALTERNATIVE PAYMENTS
90%80%70%60%50%40%30%20%10%0%
Win new customers
Build deeper relationshipswith 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%
Copyright © 2013 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).
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)
EXHIBIT 7: BARRIERS TO ADOPTION – THE CONSUMER’S POINT OF VIEW
(AS PERCEIVED BY BANKERS)
60
50
40
30
20
10
70
80
90
100
Low
me
rch
an
ta
cc
ep
tan
ce
Se
cu
rity
issu
es
La
ck
of
aw
are
ne
ss
Ine
rtia
La
ck
of
fin
an
cia
l in
ce
nti
ve
s
An
oth
er
thin
gto
se
t u
p
Inc
on
sist
en
tfo
rma
ts/d
ev
ice
s
Un
co
mfo
rta
ble
wit
hn
ew
te
ch
no
log
y
Co
mp
lex
ity
/b
ure
au
cra
cy
NUMBER OF RESPONSES RECEIVED
Rank 1
Rank 2
Rank 3
0
Copyright © 2013 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)
100
80
60
40
20
120
Uncertainty regardingcustomer adoption
Benefits of acceptanceuncertain/
unclear
Lack ofstandards
Securityissues
Highcost of
implementation
Multiplecompeting
propostions
Rank 1
Rank 2
Rank 3
0
NUMBER OF RESPONSES RECEIVED
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)
Copyright © 2013 Oliver Wyman 15
5. RESPONDING TO THE STRATEGIC CHALLENGE
We suspect many banks are not sufficiently
engaged with the challenges presented by
the rapid evolution of payments technology.
EXHIBIT 9: ORGANISATION OF ALTERNATIVE PAYMENTS DEVELOPMENT
20
15
10
5
25
40
30
45
35
Cro
ss-d
ep
art
me
nta
l te
am
Sp
ec
iall
y-e
sta
bli
she
d t
ea
m
Oth
er
tea
m
Inn
ov
ati
on
/st
rate
gy
te
am
R&
D t
ea
m
20
15
10
5
25
40
30
45
35
MANAGING ALTERNATIVE PAYMENTS PER STRUCTURE
%
Leaders
Followers
%
Cro
ss-d
ep
art
me
nta
l te
am
Sp
ec
iall
y-e
sta
bli
she
d t
ea
m
Oth
er
tea
m
Inn
ov
ati
on
/st
rate
gy
te
am
R&
D t
ea
m
0 0
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)
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).
Copyright © 2013 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.
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)
EXHIBIT 10: EXPECTED WINNERS AND LOSERS
40
30
20
10
50
80
60
90
70
0
TOP 3 EXPECTED TO BENEFIT MOST
Customers Paymentcard
networks
Mobile network
operators
%
40
30
20
10
50
80
60
90
70
0
TOP 3 EXPECTED TO BENEFIT LEAST
Currentaccount
providers
POSunit
manufacturers
Paymentcard
issuers
Rank 1
Rank 2
Rank 3
%
Copyright © 2013 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 © 2013 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.
EXHIBIT 11: ALTERNATIVE PAYMENTS HAVE THE POTENTIAL TO BE DISRUPTIVE
CUSTOMER
ISSUERS
DEVICES
(Hardware)
APPS (Software)
BANKS
MERCHANT
ACQUIRERS
DEVICES
(Hardware)
APPS (Software)
BANKS
INTERNET
DIRECT SETTLEMENT
Alternative payment opportunities
Face to face credit card transaction flow (simplified)
MAGNETIC STRIPE, CHIP
CONTACTLESS
CARD SCHEMES
Note: Indicative representation of the process and alternatives. Not exhaustive.
Copyright © 2013 Oliver Wyman 20
6. CONCLUSION
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 © 2013 Oliver Wyman 22
www.oliverwyman.com
Oliver Wyman is a global leader in management consulting that
combines deep industry knowledge with specialised expertise in
strategy, operations, risk management, organisational
transformation, and leadership development.
For more information please contact the marketing department
by email at [email protected] or by phone at one of the
following locations:
EMEA
+44 20 7333 8333
AMERICAS
+1 212 541 8100
ASIA PACIFIC
+65 6510 9700
As a global not-for-profit organisation, Efma brings together more
than 3,300 retail financial services companies from over 130
countries. With a membership base consisting of almost a third of
all large retail banks worldwide, Efma has proven to be a valuable
resource for the global industry, offering members exclusive access
to a multitude of resources, databases, studies, articles, news
feeds and publications. Efma also provides numerous networking
opportunities through working groups, online communities and
international meetings.
For more information: www.efma.com or [email protected]
Copyright © 2013 Oliver Wyman and Efma.
All rights reserved. This report may not be reproduced or redistributed, in whole or in part, without the written permission of Oliver Wyman and
Efma, and Oliver Wyman and Efma accept no liability whatsoever for the actions of third parties in this respect.
The information and opinions in this report were prepared by Oliver Wyman and Efma. This report is not investment advice and should not be
relied on for such advice or as a substitute for consultation with professional accountants, tax, legal or fi nancial advisors. Oliver Wyman and
Efma have made every eff ort to use reliable, up-to-date and comprehensive information and analysis, but all information is provided without
warranty of any kind, express or implied. Oliver Wyman and Efma disclaim any responsibility to update the information or conclusions
in this report. Oliver Wyman and Efma accept no liability for any loss arising from any action taken or refrained from as a result of
information contained in this report or any reports or sources of information referred to herein, or for any consequential, special or
similar damages even if advised of the possibility of such damages. The report is not an off er to buy or sell securities or a solicitation of
an off er to buy or sell securities. This report may not be sold without the written consent of Oliver Wyman and Efma.
AUTHOR
James Sherwin-Smith is a Senior Manager within the Payments
practice at Oliver Wyman, based in our London office.