Advanced and mobile payments: what s stopping you?

Transcription

1 Advanced and mobile payments: what s stopping you?

2 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

3 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

4 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 2012 Oliver Wyman 3

5 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 2012 Oliver Wyman 4

6 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 IN PHYSICAL PURCHASES DEFINITION OF ALTERNATIVE IN ONLINE PURCHASES Mobile wallet (NFC)* Contactless card Mobile wallet (non-nfc) Non-bank payment account Closed loop merchant account Alternative currency Non-bank payment account Online wallet (non-traditional cards) Online wallet (traditional cards) Mobile initiated/ authorised Direct bank transfer Closed loop merchant account Direct bank transfer Alternative currency 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

7 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 1 Non-alternative Alternative 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 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

8 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 & Benelux CEE -2 GSA Iberia Balkans Middle East & Africa -1 Payment using a closed loop merchant account Payment using an alternative currency Payment using a direct bank transfer Mediterranean RoW Copyright 2012 Oliver Wyman 7

9 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 2012 Oliver Wyman 8

10 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 2012 Oliver Wyman 9

11 Exhibit 3: Alternative payments offered and in development Internet banking: servicing Internet banking: payments Internet banking: e-commerce payments SMS servicing SMS payments Internet banking widely available Pay by SMS is niche Mobile banking: servicing via mobile optimised website Mobile banking: servicing via native app Mobile banking: bill payments Mobile banking: third-party payment (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) Mobile banking solutions are becoming common place, with payment and POS solutions a major development priority Contactless credit cards Contactless debit cards NFC using mobile SIM card NFC using micro SD card NFC using stickers/key fobs/ bracelets etc Contactless, mobile wallet and optical technology, while still rare, are a major development focus NFC (other) Own branded mobile wallet Available now Mobile optical technologies 0% 20% 40% 60% 80% 100% In development 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) Copyright 2012 Oliver Wyman 10

12 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 2012 Oliver Wyman 11

13 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 Exhibit 5: Banks commitment to investing in alternative payments ALLOCATION OF DEVELOPMENT SPEND TO ALTERNATIVE PAYMENTS OVER TIME % Last year This year Next year 10%+ 5-10% 1-5% <1% A INVESTMENT ATTITUDE % We are not investing in alternative payments at this time We are investing a little this isn't a priority for our organisation 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 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

14 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

15 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 standoff 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 Rank 3 Rank 2 Rank 1 Low merchant acceptance Security issues Inconsistent formats/devices Lack of awareness Uncomfortable with new technology Inertia Lack of financial incentives Complexity/ bureaucracy Another thing to set up 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

16 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 Rank 3 20 Rank 2 0 Uncertainty regarding customer adoption Benefits of acceptance uncertain/ unclear High cost of implementation Lack of standards Multiple competing propostions Security issues Rank 1 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 2012 Oliver Wyman 15

17 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.

18 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 % % Leaders 0 0 Followers Cross-departmental team Specially-established team Other team Innovation/strategy team R&D team Cross-departmental team Specially-established team Other team Innovation/strategy team R&D team 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

19 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 % Rank 3 Rank 2 0 Customers Payment card networks Mobile network operators 0 Current account providers POS unit manufacturers Payment card issuers Rank 1 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

20 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

21 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 APPS (Software) INTERNET APPS (Software) DEVICES (Hardware) MAGNETIC STRIPE, CHIP CONTACTLESS DEVICES (Hardware) ISSUERS CARD SCHEMES ACQUIRERS BANKS DIRECT SETTLEMENT BANKS Alternative payment opportunities CUSTOMER MERCHANT Face to face credit card transaction flow (simplified) Note: Indicative representation of the process and alternatives. Not exhaustive. Copyright 2012 Oliver Wyman 20

22 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.

23 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

24 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 at info-fs@oliverwyman.com or by phone at one of the following locations: EMEA AmericaS Asia Pacific 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: or info@efma.com Author James Sherwin-Smith is a Senior Manager within the Payments practice at Oliver Wyman, based in our London office. james.sherwin-smith@oliverwyman.com Copyright 2012 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 financial advisors. Oliver Wyman and Efma have made every effort 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 offer to buy or sell securities or a solicitation of an offer to buy or sell securities. This report may not be sold without the written consent of Oliver Wyman and Efma.