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.


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.


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)


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)


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)


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.


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.


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).



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


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.


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)


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.


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%


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).


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


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


Q5.2. What do you consider the primary barriers to greater adoption of alternative payments from a merchant’s perspective? (N = 158)


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


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).


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.


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

%


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.


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.


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?


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.

[email protected]

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