Mark Flamme Suzanne Lyman Javier Sepulveda. Driving Profitable Growth in Payments

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1 Leading Research Srini Venkateswaran Mark Flamme Suzanne Lyman Javier Sepulveda Driving Profitable Growth in Payments

2 Executive Summary Payments are a major contributor to success for most banks, making up 65% of total revenues on average Regulation, the economic crisis, globalization, innovation, and nonbank competition create the need for banks to reevaluate their payments offerings Against this backdrop, overall financial success requires an enterprise-wide focus on payments Commercial payments products will drive future portfolio profit growth. However, consumer payments will generate significant revenue and offer select opportunities for growth and innovation Successful payments portfolio management requires relevant capabilities in analytics and insight generation, innovation, multichannel management, and performance management Where capabilities cannot be built internally, strategic partnerships should be struck and actively managed Effective enterprise-wide payments governance is required to allocate scarce resources across the portfolio This Leading Research highlights changing client demands, the capabilities that banks will need to respond, and practical considerations for bank success Source: U.S. Banker; analysis 1

3 The payments industry can be defined as any transfer of funds, supporting services, and information flow Core Payments Industry Payer Consumer Business Government Channels Point of Sale Mobile Mail Online Tool Account to Account I. Transfer of Funds Any instrument: Cash, check, card, electronic funds transfer, automated clearinghouse, wire II. Supporting Services Personal financial management, statement services, collections, customer service, rewards and loyalty, treasury, information services, foreign exchange, clearing, etc. III. Information Flow Channels Point of Sale Mobile Mail Online Tool Account to Account Payee Consumer Business Government Treasury Tools Transaction/purchase history, invoices, Internet/mobile search data, etc. Treasury Tools Source: analysis 2

4 By this definition, the U.S. payments industry is large, at US$180 billion U.S. Payments Industry Taxonomy Consumer Commercial Cash Deposits Withdrawals Operating deposits Cash supply/ withdrawals Payments Market Sizing U.S. Payments Transactions (2009, in Billions of Transactions) EFT Payments - 21 Transfer of Funds Checks Cards Deposits Cashier s checks Debit Credit Prepaid/gift Deposits Lockbox (retail and wholesale) Purchasing Payroll T&E Merchant acquiring Cards - 68 Cash - 49 Paper Checks - 19 Services EFT Treasury Services Other Services P2P (ACH) Wire Bill pay ACH Wire Bill pay Treasury Information services Foreign exchange EDI PFM tools Fraud services Statement services Trade finance Collections Reporting Customer service Industry-specific Rewards/loyalty Payroll processing Offers Payments Banking & Finance Size of Select U.S. Industries (2009 Revenue, in $ Billions) Payments vary from 43% to 75% of total revenue among top 12 U.S. banks 219 Legal Services 108 Hotels/ Accommodations 70 Airlines 61 Motion Picture & Sound Recording Source: Nilson Report; American Banker; Bureau of Economic Analysis; U.S. Banker; analysis 3

5 Industry trends are driving banks to reevaluate payments Consumer Market Drivers Commercial Market Drivers Regulations Re-regulation with merchant/consumer bias Cost advantage for scale debit issuers Debit interchange reduced by 50 percent Death of interchange-funded debit rewards Globalization of Commerce Cross-border transactions: small but growing at ~7 percent annually Global commerce services are a major factor in businesses selection of a bank Increased demand for tools to manage global trading partner and currency risks Economic Crisis Move from consumption orientation to savings orientation Merchants shift promotional dollars to direct consumer targeting (such as merchant-funded rewards) Reduced credit environment with lower revolving balances Economic Crisis Liquidity squeeze and slow demand Emphasis on working capital optimization and real-time cash position reporting Focus on automation of treasury and payments functions Innovation Disruptive: Mobile payments; monetization of consumer insights; search-driven commerce Incremental: Prepaid, hybrid, and contactless prepaid cards; person-toperson payments; merchant-funded rewards Nonbank Competition Banks capture only 10 percent of corporate spend on working capital management Banks control 25 percent of assets used to manage liquidity Businesses desire an integrated platform that brings together treasury data from disparate systems Source: Treasury Strategies; analysis 4

6 Nonbanks pose a threat to payments incumbents Assets & Capabilities End Game Utilize mobile search, location, and payments data to close the loop and monetize online searches leading to offline purchases Value Proposition/Threat to Banks Apple Hardware and software operating system capabilities Payments processing (e.g., itunes already handles transactions for 160 million customers) Currently exploring online and offline payments by adding NFC tech to iphone 5 Revenue*: Payments (~2%) Revenue: i-platform content sales (30%) Low merchant acquirer rates Drive volume to ACH and away from cards Capture payments data details Bill micropayments to phone bill Provide deposit and checking accounts Google Superior search and advertising analytics and information management Android OS, cloud computing capabilities NFC-enabled Android phones Utilize mobile search, location, and payments data to close the loop and monetize online searches leading to offline purchases Low merchant acquirer rates Drive volume to ACH and away from cards Capture payments data details Provide deposit and checking accounts Revenue: Payments (~2%) Revenue: Ad-influenced sales (8%-12%) Isis Access to consumer data usage and location information Large physical network infrastructure to support new platforms with plans to upgrade to 4G network Large customer base and strong customer service capabilities Utilize mobile search, location, payments, and merchant SKU data to serve up offers and correlate to purchase Revenue: Payments (~1%) Revenue: Offer-influenced sales (8%-12%) Potential to acquire Discover as network and offer a merchant-centric payments alternative Capture payments data details Amazon Payments and checkout standard for online and mobile commerce (Amazon Payments) Strong search, comparison, and next-best purchase analytics Strong customer relationships Utilize total payments-related data and Amazon mall behavior to improve offer and recommendation personalization Revenue: Payments (~2%) Revenue: Mall merchant sales (8%-25%) Low merchant acquirer rates Drive volume to ACH and away from cards Capture payments data details Provide deposit and checking accounts * Revenues are per transaction. Source: Apple, Google, and Amazon websites; analysis 5

7 Against this backdrop, banks need to address a number of issues 1 Payments Portfolio What payments needs should the bank serve for its target consumer and commercial clients? 2 Required Capabilities 3 What capabilities are required in-house to deliver on the payments portfolio? 3 Partnerships How can the bank complement its payments capabilities and broaden reach through partnerships? 4 Payments Governance How should enterprise payments be managed and coordinated across the enterprise? Source: analysis 6

g., payments processing) to expand into adjacencies across both products and value chain Plays across most elements of the value chain, product range, and customer focus Examples Regions PNC Fifth

8 1 Payments Portfolio Banks follow four different payments portfolio strategies Basic Segment or Focused Bets Sum of the Parts Full Coverage EXAMPLE Plain payments offering focused on must haves (e.g., debit, bill pay, white-label credit) Plain payments offering with a few exceptions where deep capabilities are focused on a product or segment Leverages its existing capabilities (e.g., payments processing) to expand into adjacencies across both products and value chain Plays across most elements of the value chain, product range, and customer focus Examples Regions PNC Fifth Third Bank U.S. Bank Credit card products outsourced Basic card rewards programs Gift cards but no prepaid cards Payroll cards but no T&E cards Merchant processing outsourced to Elavon Source: analysis Issues its own credit cards Advanced card rewards programs Bought clearinghouse Healthcare Administration Technologies in 2006 National lockbox network; provides some white-label treasury services Virtual Wallet; personal financial management tools and payments Issues its own credit cards Advanced relationship-oriented rewards Fifth-largest merchant processor in the country; white-label services Merchant processing supports segment payments solutions around healthcare and e-commerce Broad core payments product offering Multiple consumer and commercial customer segments addressed Separate payments businesses; white-label services across the value chain (Elavon, Elan, MoneyPass ATM Network) 7

9 1 Payments Portfolio Portfolio growth will largely be powered by commercial payments U.S. Payments Products/Services Growth Trends* DIRECTIONAL Niche segments that could be profitable as volumes decline and competitors exit Select investments Traditional musthave products are declining Focus on reducing costs and increasing transaction volumes Consider outsourcing where scale is limited Profit Potential Shrinking Growing IV. Customization Custom lockbox services III. Stranded Wholesale lockbox Retail lockbox Checks Transaction dataderived offers Cash processing Consumer credit cards I. Future Prepaid cards II. Efficiency Trade finance Treasury management services Merchant services Debit cards Purchasing cards International automated clearinghouse Automated clearinghouse T&E cards Foreign exchange Growth largely driven by commercial payments services Services blending information flow and transfer of funds are growing profitability Traditional musthave products are becoming less profitable Focus on reducing costs and increasing transaction volumes Shrinking Transaction Volume Growing * Size of bubble indicates relative revenue. Source: analysis 8

10 1 Payments Portfolio Specific growth opportunities exist across commercial payments Commercial Payments Product Overview Strategic Direction & Opportunities Cash Management & Liquidity Cash management tools to monitor and consolidate global cash (e.g., notional pooling) Investment options (short- and long-term) Global cash management combined with payments to make best use of available cash Payables & Receivables Electronic invoicing and working capital optimization Connect buyers with suppliers across settlement networks Early payments discount optimization Integrated payables, receivables, payments, and invoicing Payments & Cards Trade Finance Payments via ACH, wires, and other processes Visibility of and control over payments (via purchasing cards, T&E cards, single-use cards, etc.) Management of physical and financial supply chains through integrated cross-border trade and logistics management solutions (e.g., letters of credit, commercial trade documents) Payments integration with accounts receivable/accounts payable liquidity Regional or global market card programs Purchasing cards and single-use cards Letters-of-credit-related revenue accounts (largest fraction of trade revenue) End-to-end supply chain financing products Information & Reporting Consolidated, up-to-date view of account balances and demand deposit account services Global cash and investment positions Cross-product information Risk management via forecasting and scenario analysis Source: analysis 9

11 1 Payments Portfolio However, growth opportunities do exist in consumer payments Consumer Needs and Opportunities Payments on the Go Convenience Financial Management Recognition & Rewards Consumer Needs Enable me to use my mobile to buy goods in a physical store Allow me to instantly purchase/pay online Enable me to rapidly transfer money Give me anytime access to account information Save me trips to the ATM or branch Offer me products accepted by most merchants Help me track expenses and stay within my budget Remind me when bills are due Help me lower my late/overdraft fees Personalize my rewards based on what I like Offer me rewards and coupons via mobile Reward me for being a loyal bank customer Opportunities Person-to-person payments online and through mobile Mobile and online money transfer Enhanced mobile banking functionality Mobile alerts Mobile payments Prepaid cards Customizable mobile and alerts Relationship-based rewards Merchant-funded rewards Transaction data-based personalized offers Source: analysis 10

Elm Street XXX-XX-XXXX XXX-XX-XXXX (213) 551-0000 (213) 555-2323 XXX-XX-XXXX XXXXXXXXXX Cel John_Doe@gmail.

Selection Criteria Framework General Selection Criteria Sample Criteria for ATM Services Vendor Negative EVA Functional Capabilities & Experience Value Add Services Core functionality /

to fit bank specific needs Offer additional services (e.g.

12 2 Required Capabilities To succeed, a payments strategy must be supported by core capabilities Product Set & Usage (e.g., debit card spend) Channel Usage (e.g., online banking) Insight & Analytics (Market, Client) Client Profile Screen Shot Client Client Customized Solutions Client Information Financial Statement Financial Goals and Follow-Up John Doe 155 W. Elm Street XXX-XX-XXXX XXX-XX-XXXX (213) (213) XXX-XX-XXXX XXXXXXXXXX Cel John_Doe@gmail.com $250,000 l: X XYZ Biz Opportunities X 230 Cherry Tree Lane (213) (213) John.Doe@XYZBizOps.com Profile Weekday Evenings Banking Relationship Client Relationship Builders Exit Process Request Print Sample Capabilities Product & Service Innovation Competitor Share of Wallet Analytics Client Interaction Payments Cost & Performance Management Payments Channel Management Product Portfolio Assessment Regulatory Management Vendor Management Partner Selection Criteria Framework General Selection Criteria Sample Criteria for ATM Services Vendor Negative EVA Functional Capabilities & Experience Value Add Services Core functionality / scope of services provided -- ability to operationalize bank's short and long term objectives Superior customer service and resolution support Ability to customize offerings / software to fit bank specific needs Offer additional services (e.g., industry research, etc.) Innovative ATM functional capabilities e.g., Dispense alternative media (e.g., prepaid cards) Issue targeted offers based on client PIN identifier Pricing & Negotiating Leverage Implementation Risk Offer competitive pricing & terms (e.g., no switch fees) Simple rate card and fee structure Vendor considers opportunity to be of high value Lead time to implement solution is reasonable Minimal risk to financial targets or operations Network reliability and fast processing National ATM/POS coverage Simple pricing structure and terms Exceptional service e.g., Monitoring tools Branch ATM Online Conflict resolution Commitment & Resources Vendor considers Key to be a long term partner Provider has capacity to deliver against set performance metrics / SLAs Fraud protection Seamless Origination & Transaction Source: analysis 11

13 2 Required Capabilities Example: Consumer payments capabilities Capability Insights & Analytics Objective Govern data to ensure quality and employ it to draw actionable insights Success Indicators Data governance model in place, including accountabilities for data quality Analytics capable of generating actionable insights Personalized channel experience for customers based on their past behavior Innovation Actively experiment to improve the customer experience Active engagement with vendors on new payments developments Existing test-and-learn process that encourages small-scale experiments, captures lessons learned, and places calculated bets on innovations Wide-ranging partnerships (e.g., Cardlytics) Cost & Performance Management Engage customers while driving down processing costs Management reporting on performance by instrument Active vendor management for key vendors (e.g., networks, processors) Demand management that constantly rationalizes purchased services and reports Engaged cardholders with above-average card activation and usage Channel Management Ensure consistent and convenient customer experience Reporting on types of transaction by channel High percentage of low-complexity transactions through automated channels Consistent customer experience across channels High level of online banking functionality Source: analysis 12

14 2 Required Capabilities Example: Treasury management capabilities Capability Insight-Based Product Design Insight-Based Pricing Sales Channel Management Objective Integrate and bundle products based on client needs Simplify pricing structure of products Coordinate sales efforts across products and segments Success Indicators Integrated treasury service products to create seamless solutions Design client-need-back, not product-capability-back Examples: Supply chain solutions with integrated procure-to-pay, payments, and commercial cards Simple pricing options, differentiated by segment 2 to 4 standard-priced bundles, at varying levels of sophistication Menu pricing for add-on options Simplified billing to reduce administrative burden on client and provider Aligned relationship managers and treasury product managers Utilize product bundles/suites as an opportunity to cross-sell Resources realigned and dedicated according to client need Service Channel Management Provide enhanced self-service capabilities Self-service product capabilities via online channels Streamlined product platforms Improved user interface Treasury platform: Current investment focus of major banks Source: analysis 13

15 3 Partnerships In some cases, partnerships can be leveraged to fill capability gaps Partnership Arrangement Matrix Example: ATM network contract between BB&T and Allpoint Example: Network contract between Citi and MasterCard Example: BofA and HealthLogic Example: Bank of Montreal and Diners Club U.S. Discussion Permanent Financial conglomerate Merger Acquisition There are many variations of partnership agreements Commitment Long-Term Transactional Preferred supplier agreement Annual or multiyear purchase agreement Commodity purchase Core information sharing Strategic sourcing Request for proposal Core resource sharing Crossbranding Collaborative distribution Development venture Programmatic Partnerships Purchase agreement with up-front funding Ownership alliance Joint venture Strategic Alliances Partnership agreements within payments can be broader than a standard sourcing contract In some instances it may be beneficial to form a long-term strategic alliance No Linkage Shared Info Shared Resource Shared Funding Ownership Cross Equity Shared Equity Wholly Owned Example: BofA and First Data for merchant acquiring Example: Chase & CashStar for mobile rewards Example: Co-branded card portfolios Example: Green Dot & Kmart s agreement for prepaid cards Example: Isis joint venture among AT&T, Verizon, and T- Mobile Source: analysis 14

16 4 Payments Governance Banks should govern payments at an enterprise level Rationale for an Enterprise Payments View Portfolio Management Infrastructure Management Payments represent 65 percent of bank revenues on average and are often unmanaged Payments products represent a portfolio in which some are in decline (e.g., checks, cash), some are mature (e.g., consumer credit cards), and some are in growth mode (e.g., prepaid cards) Intelligent trade-offs are required to allocate limited investment resources Business-to-business-to-consumer products (e.g., businesses distribute payroll cards to consumers) Internal payments infrastructure spans lines of business (e.g., automated clearinghouse transaction processing across consumer and commercial products, check processing across lockbox, loan servicing, and deposit operations) External partnerships span enterprise (e.g., card processing across all products) Customer Experience The transfer of funds represents a commodity in the overall commerce process Improving the commerce experience from the customer s point of view rather than a product point of view is required The customer commerce experience spans the enterprise B2B2C Opportunities Several payments products are sold to businesses for distribution to consumers (e.g., T&E cards) Enterprise operational, sales, and marketing coordination is required for success The information exhaust from payments activities is often a significant asset for fostering business-tobusiness relationships Source: U.S. Banker; analysis 15

17 4 Payments Governance There are four payments governance models that banks can follow Sum of the Parts Council-Led Payments Payments managed by the lines of business as part of the product suite Key Success Factors Common payments taxonomy and understanding Payments as an executive committee agenda item Clear payments dashboards Council Formal payments management council Supporting structure, active subcommittees, and payments strategy support resources Key Success Factors Independent from lines of business Clearly defined roles and responsibilities Externally visible Support resources to inform agenda Executive-Led Payments Executive-level individual with payments oversight responsibility Key Success Factors Member of senior executive team Clearly defined role P&L responsibility Sufficient support staff Business-Led Payments Payments managed as stand-alone business Payments businesses support lines of business as vendors Key Success Factors Experienced management team Industry-leading service levels Service-level agreements with the lines of business Payments Executive Corporate Payments products and services Lines of business Source: analysis 16

18 Contact Information Chicago Mark Flamme Principal New York Srini Venkateswaran Partner Resource Customer-Centric Treasury Services, by Ramesh Nair and Brodie Dixon (, 2011). and_white_papers/ic-display/ Javier Sepulveda Senior Associate San Francisco Suzanne Lyman Senior Associate

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