PwC to FIs: To Succeed in the Mobile Payments Ecosystem, You Need to Act Like a Tech Start-Up Q: Hi, it s Karen Webster for PYMNTS.com, and I m here today with Femi Odunuga, who is a Director at PwC s financial services practice. Hi, Femi, how are you? A: Hi, Karen. I m good. How s it going? Q: Well, it s great, and I m glad that we ve had a chance to, to get together with you. I know we re here to talk about a subject that is near and dear to your heart and that of your clients, and that s mobile payments. I thought it would be great to get your point of view on a topic of conversation that of course is very important to our readers and is obviously an enormous opportunity for the various players in the mobile payments ecosystem, so why don t we get into it? I know you ve looked recently at the existing mobile payments environment, which has really evolved a lot over the last couple of years, and so I m curious to get your take on where we are now, specifically thinking about how incumbent financial institutions are handling the challenges from those newcomers who are increasingly occupying the space. A: Sure, sure thing, and thanks, thanks again for having me. I would say the industry is halfway through the discovery cycle, and we re starting to see that mobile payments is not, it s not vaporware. Over the last year, in talking to incumbents in the traditional ecosystem, we ve received questions that have changed dramatically from what we ve heard them ask us in the past. FIs are no longer asking us if they should play in the space; the questions are now about how they should play to get the most of the $20 billion question. So that switched from an if to a how, just signifies a shift in perception at the marketplace. We, we have observed that FIs are now beginning to see the threats, as 1
well as the opportunities, and are looking for ways to play to ensure they, they maintain their lead in the market. Late last year we conducted a consumer survey, and it showed that FIs were favored 70% ahead of every other player in the space when it comes to consumer trust, as related to the financial safety and data, but where Europeans are -- you know, the situation was such a change, and we may see this lead slip if they don t react quickly. As you are aware, you know, just quoting Tim Cook we are, we are now in the post-pc era where customer adoption is, is greatly accelerated by technology, and this pace of change, we are seeing translates to financial services, as well. So that change of pace is something that we feel needs to be accelerated by FIs generally, and they re beginning to realize it, as well. Q: So, so do you think that that s mostly because they re, they re concerned about losing their, their place of stature in the, in the payments ecosystem, or because they re hearing from their customers that they actually want these kinds of services and capabilities? A: I think it s both ways, honestly. That s, that s the way we see it. Demographically speaking, the, the consumer preference is if you think about the Gen Ys and the Gen X has shifted dramatically from what it was five years ago to what it is today, so from a consumer demand perspective things have changed, so consumers, they re expecting different services and different offerings from their banks and from their issuers today, versus what the, what they were fine with five years ago. And then flip side of that, as well, there s the threat on incumbents. Startups are popping up every day with nifty solutions and robust offerings that stand a good chance of tripping up what we, what has been stable for, for last ten years, so to speak, in terms of opportunities for the banks from, you know, processing fees and interchange, and, and startups are threatening to take the cake, so to speak. The advantage startups have over the big banks, though, is a, is this pace of change and the ability to adapt quickly. Banks, banks are not seen to do that. So it, it s both ways, and you re, you re spot on: it s both consumer driven, and 2
also a fear of the risk in the marketplace. Q: Interesting. So, so what exactly are FIs doing today to, to, to really be a relevant player in the, in the mobile payments arena? And then I m going to ask you a tough question: do you think it s enough? A: That s a... So that s two very good questions. I think on the macros end, there are three key ways we re seeing FIs play today. One: it s through partnerships collaboration and, you know, small acquisitions across the value chain. The second thing we re seeing is, is the push for EMV, which implicitly will have an impact on terminalization, which has historically been a big hurdle for, for the takeoff of mobile payments. And then the third thing we re seeing FIs get into is a technology mind shift, if you may, from the idea of a single mode, mechanism of technology for NFC or QR codes, to becoming more open to the adding a layer, so to speak, of cloud processing capabilities in there. So those are the three things, the three positive movements we ve seen in the landscape that FIs are, are taking. However, it s necessary to say that -- to answer your second question, most plays we re seeing are going through what, what some organizational ecologists call liability of obsolescence. Essentially, there s a growing mismatch, and it s fine, but that s the reality of it, right? Because if you, if you observe, there s a growing mismatch between financial services world and the surrounding environment. Things are moving way faster than the pace of change you see FIs responding to. Technology deployments are coming out each day, but FIs are, you know, slow to react. You know, so there s that mismatch, and we feel, FIs need to kind of almost take deliberate steps to shift their mindset and approach the market differently. For example, we tell FIs in the long run they need to start thinking and acting more like technology companies that offer banking services, versus the current mindset of, Oh, we re a bank that has some technology capabilities. Q: Mm-hmm. That, that is, that, that is easier, easier said than done for lots of reasons, but I 3
think that s a, that s a very keen insight. But there, there are lots of things that FIs can tap into that would, would obviously have a huge impact on their ability to, to play large in the, in the mobile payments arena. What, what kinds of innovations and then related revenue sources do you think remain an untapped potential for, for them? Did you have any thoughts on that? A: Yes. We have a few, we have the few thoughts. When we, when we think about impact on FIs we, we could see it, you know, broadly, and that was just really as impact of what they could do, but broadly of the impact of what happened around them, and I ll answer that first. What comes to mind is three, three key innovations that could change the game dramatically for FIs, right? One is the evolution of what we call the left-hand side of the wallet, and I ll talk a little bit about that. The second one I ve touched a little bit earlier, which is cloud processing. And the third one is account, account settlements, and the possibility of a real time version of those. To give context on the left-hand side of the wallet, what we mean there is, you know, if you think about your physical wallet today, your credit cards are not the only things that are in there. So the other things that are non-transactional that you carry in your wallet today -- you know, business cards, credentials, IDs, loyalty cards, things like that, access cards -- are all within your wallet. What we believe is that with the evolution of the mobile payment space, or mobility as a whole, the left-hand side of the wallet are things -- they re your persona, and everything that has to do with your life outside of the transactions will start to grow. And the evolution of this will strongly impact how mobile payments of the world adopted, and also the amount of opportunities that are open to FIs today and traditional players today in that space. Cloud processing we talked about a little bit, but if you think about what could happen down the line if cloud processing actually does take up the way we ve seen it happen today, legacy systems will become redundant and just become dumb pipes, you know. Plastics issuance could become back burner solutions. Imagine the 4
impact of that on interchange, and the increased ease of, of customers switch incur. And then the third one, which, which is actually very interesting, is the account-toaccount settlement. The idea is around this, that there ll be real time accounts or account settlement solutions in the marketplace. While, while those solutions are untested, but the possibility of them actually, you know, taking off presents major threats to the ecosystem that, you know, would impact financial services as we know it today. Q: Well, I think -- and I think all the things that you, you mentioned represent opportunities where FIs can leverage core capabilities to, to really make a difference for themselves in the, in the mobile payments landscapes. Isn t, isn t that right? A: Well, that, that is right, if FIs react and play accordingly to enter into those spaces. But a lot -- the other things I mentioned, they are not within the core space that FIs play today. Q: So is that, is that what you mean when, when you use the term descend and extent? I know that s something that, that you talk a lot in, in the white paper, which we ll, we ll tell people about how to get at the, at the end of this, this, this discussion. A: Yes. Yes, that is, that is true. You know, by defend we, we mean, you know, ensuring they don t lose out on the assets they have today, so think about consumer trust. Seventy percent of consumers trust FIs over every other player in the space today, right? Think about security: people trust FI security standards. Data, interchange, revenue: those are things that are what they have today as assets, good financial institutions, and those are the things they need to defend. And by extend, we then mean designers have to get them outside of, for want of another word, their current offerings, their comfort zone, to play in places like value added services that we spoke about, or, or the left-hand side of the wallet, if you may. Q: Mm-hmm, mm-hmm. So, so it, it appears that PwC has identified five very different types or models that could end up winning out in the mobile payments space as it, as it relates to FIs, and you seem to go so far as to suggest that FIs need to be ready to play nice with 5
any of those models. What do you mean by play nice, number one? And then how do you help clients evaluate their options and, and really prepare for a market that has such a variety of possible outcomes? A: That s a, that s a very good question. The phrase play nice, when we use it, we talk about collaboration across different players, right. It s not, doesn t necessarily mean -- and people misconstrue this when we say to play nice, but it doesn t necessary mean just signing off on every dotted line. It means making strategic investments in your business to be able to collaborate across the value chain. For example, we, we expect to see more acquisitions and, you know, partnerships between large banks and small startups. One is historically slow to adapt, you know, due to scale organizational constraints -- people, processes, technologies, et cetera. The other lives and breathes change, they pivot every day of their lives. One idea we offer up is for clients to reinvent their mobile payments teams and separate them from their core organizational processes that cause delays, so they can test and learn and roll out solutions at the required pace the industry expects. Players that adopt this approach will have a higher likelihood of being able to, as we say, defend and extend, like we said. But that said, the future is still uncertain, and in planning for an uncertain future generally, you know, there are three types of investments that can be made. There s the high risk/high reward investments, or big bets. Second, there are the hedging bets with multiple options. And then third is the no regret investments. At a minimum, players need to be thinking about the last two, hedging their bets with multiple options or making no regret investments, to be prepared for the changes in the marketplace. So what we advise our clients at PwC -- essentially, we help them think through the type of investments they should be making given their current position and aspirations in the marketplace, and then how those investments or plays should be made and when they should be made. Broadly speaking, we, we help our clients all the way from strategy to technology to actually 6
taking the products to market. These are things we ve done in the market space are solutions we ve helped our clients take to market today. And as you d know, Karen, our services range from payments -- within payments, covers business design, analytics, technology solutions, architecture, all the way through program and change management. So it s the whole gamut of, you know, from thoughts to, you know, just taking things from the cloud, so to speak, and hitting, making it hit the road. That s how we support our clients through, through this. Q: Well, thanks so much, Femi, for giving us this really wonderful perspective on, on the framework for helping FIs seize the opportunity that is in front of them with respect to, to mobile payments. And I d like to let our readers know that a lot more of this kind of information can be found in your white paper, which -- I love this title: Dialing Up a Storm. It s a, it, it, it s a great title, and it has lots of really great insights and more about the five models that we just touched upon, as well as a whole lot more. So thanks again for sharing such great information with us, and we look forward to catching up again with you soon. A: Thanks for having me, Karen. It was a pleasure. 7