a.t. kearney/ efma · value-add is the key to spark customers’ interest, e.g. reduced friction...

Andreas Pratz ([email protected])Mischa Koller ([email protected])

March 2017

Report

Frictionless payments & wallets

A.T. Kearney/ Efma

mailto:[email protected]

mailto:[email protected]

A.T. Kearney_Efma_Frictionless payments and wallets/uewttYQkl761IlIRml 22

Non-cash payments have grown 6 percent annually across Europe over the past decade. We estimate that by 2022 there will be more cashless transactions in Europe than those using cash. Around the same time, one in 10 non-cash payments will be made through alternative payment methods, typically with providers other than a consumer’s primary bank. This is a wake-up call for traditional providers, as the alternatives will end up with the bulk of a transaction’s profits.

Across all different payment situations, however, a few trends are seen as driving change, and specifically leading to the rise of cashless transactions: i) Connected consumers with a growing preference for cashless, ii) Connected devices with new situations for commerce and services, iii) lower costs for merchants and billers, and iv) deeper integration of services. These trends are leading to a major change on the horizon: the need for seamless payments as frictionless commerce rises.

“Frictionless” commerce occurs when a consumer purchase is automatically initiated without an explicit consumer purchase decision. Instead, purchase decisions are made on behalf of the consumer, with his or her advance consent, using real-time, integrated data from preferences, past behaviors, sensors, and other sources of contextual data. Any move to frictionless commerce requires seamless payments to keep pace. With orders being pre-filled and automatically or at least conveniently authorized such as fingerprints or facial recognition, this is a big step forward from what we could call the “traditional digital” offerings now widespread in both physical and digital channels.

From cashless to frictionless


Payments: Essential part of daily life & high frequency business

Frequency per year(Germany)

Source: A.T. Kearney

012242430

140

Payment

700-800x

New current account

Account statement

Cash withdrawal

Supermarket Account checking

Fuel

>2x daily(thereof >1x

non-cash in 2025)

2-3x per month

2-3x per month

~2x per month

~2x per month

1x per month

1x every 10 years


Headroom for growth and innovation – F2F and P2P as main growth space

European payments per capita per year

10080

140

450

30

800 yearly payments per

capita

Light shading: Paid in cash or chequeDark shading: Paid by card, direct debit, credit transfer


Business and administration:SMEs as main innovation area

Recurring payments:More control for payers(‘request-to-pay’)

Face-to-face (F2F):Displacing cash & cheques outside retail –education, care, services

Person-to-person (P2P):Domestic mobile services and international remittance

eCommerce:Convenient checkout,wallets, mobile


Non-cash transactions expected to continue on growth path and to outperform both value and revenues developments

1. Europe = EU28 + Norway + Russia + Switzerland + Turkey, all non-cash payments except ATMCAGR = Compounded annual growth rate; ATV = average transaction valueSource: A.T. Kearney Payments Market Model

Payment shift: non-cash payment evolution(Europe1, CAGR 2015-2025F in %)

3%

5%

6%

Revenue

Value

Transactions

Besides the recent reduction of interchange fees in the European Union, innovation is helping to improve availability and experience with cashless payments. It is accompanied by an ongoing shift from face-to-face to digital commerce

Cash displacement is leading to an increase of low value payments and thus to a continuous shrinking ATV. Therefore, growth of value is lagging behind the growth in number of transactions

Biggest growth is forecasted for merchant acquiring, an area now mainly in the hands of specialized payment providers, as well as in alternative payment methods – an area for global specialists, digital giants and large global e-commerce retailers


Open access to accounts for third parties based on PSD2/ XS2A is considered as a ‘Game Changer’ within the European payment environment

2%

Blockchain 8%

Tokenization

Others

26%

PSD2/ XS2A 32%

17%

Instant Payments

21%

Mobile Wallets

Account Information Service Providers (AISP)

Payment Initiation Services Providers (PISP)

Account Services Payment Service Providers

(ASPSP)

• Need to develop open standard interfaces

• Required to offer non-discriminatory access

• No confirmation of cover, but only info and initiation

• Bearing costs & liability

• Account access mandated by the user

• Max. 2 automatic data retrievals per day (without user consent)

• Using authentication procedures of the ASPSP

• No fees no be paid to the ASPSP

Expectations regarding external disruptors(% of answers, n=57)

PSD2 = Payment Services Directive 2; XS2A = Access.to-AccountsSource: EU Commission Payment Services Directive 2, EBA Consultation on RTS, A.T. Kearney survey of payments industry experts


Players within the digital economy use already APIs to better reach and serve their customers

Focus on core processes via digital ”partnering/ platforming” for further features

Tapping into new distribution channels via integration into various user situations

GPS, location mapping, and

route optimization

sms notifications

Paying with Amex points

Automating email campaigns

API

API

API API

Open ecosystems


API


0

5

10

15

20

25

30

35

40

45

50

55

60

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

Proliferation of IoT devices enabling frictionless experiences

Growth of connected devices (in bn devices, globally)

• By 2020 in the world: 30-50 billion devices; >7.7 billion people; >3.5 connected devices/person

• By 2020 in Silicon Valley: 20+ as many devices; >3.2 million people; >60 connected devices/person

• Mobility, Smart Home, Wearables, SmartTV etc. all connected and initiating transactions –and payments

• Need to target device manufacturers not users to capture payments flows

‘IoTinception’

1m connected computers

0.5bn connected computers

Acceleration of machine-to-machine

Status quo: twice as many connected devices as humans on the planet

Connected sensors, e.g. in traffic lights, parking spots etc.

Integration into private environments, smart home, connected car

Source: Brian Solis, Cisco, A.T. Kearney


A “Frictionless Day” - perhaps in the not-so-distant future


7h40

Smart appliances. The customer's connected coffee machine detects that he is low on coffee pods and automatically triggers a delivery of and automatic payment for new pods.

8h20Toll-road pass. As the customer drives on the toll road, his license plate number is scanned upon entering and existing, and payment is automatically triggered

12h10

Shopping. The customer walks into a convenience store and selects the products he wants, and, thanks to facial recognition, is automatically charged as he walks out

14h30

Preventative maintenance. A car maker analyzes the weather forecast, locates the car on the street, and sends out a mechanic to rise winter tires while the owner is at work

16h20

Entertainment. After dinner, the user watches his favorite series on Netflix

20h50

Anticipated need. The customer orders a flashlight for tomorrow’s hike. Amazon, using data about use patterns to predict the purchase, has already shipped it to a local delivery center and can deliver it within a few hours.

Sensors only Subscription PredictiveIdentification techniques


Central role of mobile

The general consensus of our surveyed payment experts is that mobile is the most important innovation area, followed by alternative methods, authentication methods (especially biometrics) and cards. Innovation across every step in commerce – including, of course, payments, will boost the spread and growth of frictionless commerce. This innovation, however, comes at the price of more choice and complexity. Indeed, there is so much going on in payments today that it often deters consumers and businesses alike from adopting payment techniques and options that would be better than what they use today. For the industry and for users, it is important to separate the wheat from the chaff.

Control in the payments universe is shifting: from payment providers to consumers, billers, and device makers. In the old world, banks dictated, controlled, and often offered up the infrastructure being used. They provided merchants with a terminal and (part of) the infrastructure, while also providing the consumer with a card. This world is disappearing. In an instant world, payments much more quickly achieve a finality that is hard to revert. Therefore, a different form of control is required.

As consumers ride the wave of technological innovation, they are increasingly seeking a frictionless experience – while at the same time demanding data security and privacy. The payments experts we surveyed expect mobile to run the show soon, helping users manage their credentials, limits, channels, merchants, and uses – instantly and wherever they are.


Most innovation and complexity expected to come from mobile

23%23%

33%34%34%

54%

Processing infrastructures(e.g. Blockchain)

Cards(contactless payments)

OthersAuthentication methods

(biometrics, behavioraldata etc.)

Alternative payment methods(e-wallets, OBeP

etc.)

Mobile(ApplePay,

retailer apps etc.)

Main expected innovation fields in payment methods(% of respondents, n=57)

OBeP = online banking electronic paymentsSource: A.T. Kearney survey of payments industry experts


Mobility everywhere


Changing behavior and infrastructure

Shopping

Paymentacceptance

Offline shopping E-/m-commerce Mobile payment IoT payment

Countertop terminal In-app mPOS IoT acceptance


With more than 50% consumer globally already continuously connected,…

Consumer connectivity

7% 7% 7% 9%

42% 42% 48% 51%

23% 26% 21% 18%

28% 25% 24% 22%

DE

100%

UK

100%

US

100%

Global

100%

Once a day or less2-4 times a dayEvery hour (> 10 times a day)All day long

Source: A.T. Kearney Study “The Connected Consumer”, A.T. Kearney


… need for mobile as a ‘control tower’ for transparency across all payments

Multiple use of mobile functionalities to control life

Check in-app notifications while shopping, product navigation, wish-listing etc.

Shop

Share experiences with friends via social media, e.g. social shopping etc.

Share

Research products on the go anywhere using mobile applications or websites

Research

Pay in-app, online or in-store (contactless / BLE) using the mobile phone

Pay

LocateUse location services for navigation purposes or in-store product locator services, etc.



Mobile wallets are increasingly offered by all of the players involved in a transaction competing for customer acceptance. Every player is trying to leverage its specific hook: Banks’ offering are based on trust and access to the customers, mobile device makers/ OS providers are betting on better integration into the mobile phone’s operating systems, infrastructure providers are pushing the benefits’ of broad acceptance whilst merchants try to offer benefits with seamless integration into their checkout processes.

According to the interviewees of the Efma expert panel, financial service companies are in a good position to tap the potential of mobile wallets. The surveyed experts expect that mobile payment has to offer more than just ‘payment with a mobile phone’ to become successful. Value-add is the key to spark customers’ interest, e.g. reduced friction due to loyalty card integration, couponing, or digital receipt management.

Besides these cornerstones for getting customers’ interest, their behavior has to be changed as well. If mobile wallets should become part of the daily life of customers then frequency is the key to it. There are different ways to achieve this: Ranging from high-frequency vertical use-cases like transportation as a starting point to broad horizontal ones emphasizing a universal applicability of mobile payment across F2F and m-commerce situations. Commercialization will remain a challenge with hope on value-add services. We observe a scattered European landscape with multiple initiatives: The race has been started; yet it is too early to award the winners.

Winning in mobile wallets


Winning in mobile wallets: Views from Efma expert panel

F2F = Face-to-faceSource: Efma expert panel, A.T. Kearney

“Banks are best positioned for mobile wallets due to superior trust of customers in the field of payments”

“Changing behavior is difficult – value-added services needed for success”

“We are still in a learning phase and we are step-by-step adding valued-add features”

“Schemes’ competitive edge is cross-channel acceptance (e-/ m-commerce and F2F”

“High frequency use case essential to establish mobile payment. Change of customer behavior will take 3-5 years”

“P2P is a great for viral distribution – you need to download the app when receiving your money for the first time”

“Commercialization is difficult – additional revenues just for value-added services (e.g. loyalty card integration)”

“Manufacturers are the only ones which can integrate wallets seamless into devices with app opening automatically if needed”

“No fees for loyalty card integration possible”


Various hooks for mobile wallet offering

Hooks for mobile wallet offering


Funding and trust/ broad customer base

Improved shopping experience

Device and OS usability/ broad customer base

Broad merchant acceptance

Examples

Mobilewallets


Customer base, trust, access to current account

Customer base, seamless integra-tion into device, secure elements

Trust, international standards and usability, broad acceptance

Loyalty cards and offerings, seamless integration into checkout

Financial service companies well positioned to seize the opportunity

Position to provide mobile wallets to the market and assets to be leveraged(# of ranked as best positioned, multiple answers possible, n=6)

Source: Efma expert panel, A.T. Kearney

0

1

2

3

5

Merchants

Schemes

Non-financial infrastructure providers (e.g. mobile operators)

Device manufacturers/ OS providers/ social networks

Banks


More is needed than just „payment with a mobile phone” to change customer behaviorEfma expert panel view on success factors

Source: Efma expert panel, A.T. Kearney

Suitable use cases for traction

• Buying transportation tickets

• P2P-Payments

• Replacement of closed loop systems (e.g. staff canteens)

• Integration in everyday-apps like messengers

• Use-it-everywhere: Universal applicability in F2F as well as in m-commerce

+

Cornerstones for mobile wallet implementation

Examples

Security/ trust: Tokenization, biometric authentication, chargeback process, buyer protection

Acceptance: Use of existing scheme infrastructure, cooperation with terminal providers

Convenience/ value-add: Improved check-out via automatic loyalty integration, receipts, coupons

Costs:Current account integration, pricing

Trustful, value-adding foundation… …high frequency to get used to it


Establishing your service as a control tower is particularly important if you cannot standardize the product – myTaxi vs. UbermyTaxi app downloads (mn. #)

Source: myTaxi, A.T. Kearney

Book and reserve taxis in Germany and abroad

Book

Receive frictionless receipts, get an overview about drives

Manage

Evaluate drivers and select preferred ones

Persona-lize

Pay in-app using the mobile phone (credit card and PayPal)

Pay

Get rewarded

Earn loyalty points frictionless

Use case merchant wallet

0

1

2

3

4

5

6

7

8

9

10

2011 20132012 2014


Commercialization still a challenge – hope on value-add services

Commercialization options for mobile wallets(# of responses, multiple answers possible, n=6)

1. Additionally to existing transaction feesSource: Efma expert panel, A.T. Kearney

0

1

2

3

1

22

3

Freemium Per transaction1Free Monthly fee/flat fee

Payer

Payee

Commercialization options

• From payer:

– Guarantee prolongation

– Insurance service

• From payees

– Revenues through additional transactions (cash displacement)

– Advertisements, integration of loyalty and special offers

– Analytics services

• Repositioning as a marketing service (instead of cost item)


MobilePay

Although still in the early-stage, mobile payments (wallets) are evolving across Europe – with some examples of remarkable uptake

Selected examples

DK = DenmarkSource: Danske bank, A.T. Kearney

European mobile payment (wallet) landscape

3rd most frequently used app in DK(after Facebook and Facebook Messenger)

3.7 million users in Nordics

~10 bn. Euros transferred until end of 2016

> 5,500 webshops are accepting Mobilepay


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Dedicated DigitalPayments-Team with comprehensive expertise in Europe

Future of Payments

• Payment markets model (global revenue pools)

• Future of payment methods

• Assessment of digital field of innovation

Banks /Issuer

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• Product- and segment strategy

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Acquirer & PSP1

• Acceptance development

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Processor

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• Provider excellence

Card organizations

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• Product launch

• Go-to-market support

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• Network in the payments community and bank initiatives

• Working closely across industries, especially with retailers and mobile network operators

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