PAYMENT PRIORITIES: FOUR THEMES DRIVING CHANGE

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Global trends, changing business models and innovation are creating a new set of challenges

for the world of payments. New entrants, able to facilitate their own payment processes,

are both a threat and an opportunity to many existing financial services players in the

ecosystem. However, the need to support new payment methods, handle new payment

channels and launch more innovative products more quickly is placing even more demands

on systems already creaking under the strain.

This paper explores key themes driving change in payments and assesses the likely impact

of open banking and real-time payments. It also highlights challenges that stem from the

management of network complexity and the multiple facets of globality that persist.

Payment Priorities: Four Themes Driving Change

EXECUTIVE SUMMARY

Open banking is now a reality in Europe, driven in

part by regulation but also by the desire to improve

customer experience in the face of possible big tech-

driven competition and the need to expand future

revenue streams. In the U.S., The Clearing House

has rolled out a comprehensive real-time payments

system, while usage of Zelle — the bank-backed

offering in the lucrative person-to-person (P2P) sector

— is surging, with Bank of America estimating the

network processed close to $40 billion in Q2 2018,

a massive jump from the $25 billion in the previous

quarter.

The requirement for real-time payments to support all

payment types — including P2P, business-to-business

(B2B), business-to-consumer (B2C) and consumer-

to-business (C2B) — is forcing radical change to

legacy systems that have reached their limits. Solving

the challenge of integrating real-time payments into

existing infrastructures and driving value, reducing

transaction costs and delivering new services is a

conundrum that must be solved and soon. Some

banks are throwing caution to the wind and opting

for wholesale transformation, while others are content

with steady, incremental change. In both cases,

managing the complexity of an environment full of

FinTech competition, digital expectations, and shifts

in regulatory and security compliance is of the utmost

importance.

Even the once mundane cards market is having to

face up to the possibility of disruption as merchants

consider real-time, bank-to-bank transfers as a way

to reduce interchange fees, gain direct access to

valuable transaction data and pass on savings to

increase customer loyalty. In fact, maintaining a high

level of customer satisfaction has never been more

important, as social media provides a powerful outlet

for consumers to voice discontent, and FinTechs loom

as appealing alternatives.

Platform providers (Google, Apple, Facebook,

Amazon, Alibaba, etc.), digital wallet providers, money

transfer apps, mobile POS providers and digital-only

banks are but a few of the disrupters that will continue

to chip away at established players, not least because

they embrace and enable globality. This relatively new

term refers to the ability to work with existing and

new payment networks around the world with ever-

decreasing cost. It is also a phenomenon that is being

driven by the appetite of Chinese and Asian tourists

for international travel and their reliance on apps such

as AliPay and WeChat, which are entrenched in all

aspects of commerce and payments in home markets.

Real-time payments, open banking disruptors,

globality and increasingly complex payment networks

are driving change in today’s payments landscape.

Together, they form the defining issues for the future

of payments.

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January 2018 saw the arrival of open banking in

Europe with the rollout of the revised Payments

Services Directive (PSD2), which includes new rules

that require financial institutions to open access to

client accounts to approved and client-authorized

third parties. The goal of open banking regulations

is to transfer ownership of the account from banks

to the customer. This new regulation has ushered

in a new banking era where data and services can

be accessed securely by third parties and will most

likely be enabled through Open APIs (Application

Programming Interfaces).

Given its own open banking regulation, the U.K. is a

great example of how countries are implementing

PSD2. The U.K.’s local designated authority, The

Competition and Markets Authority (CMA), has

mandated that the nine biggest banks and building

societies (The CMA 9) open access to third-party

providers that have been registered and approved by

the Financial Conduct Authority. The list of regulated

providers has continued to grow since the law went

into effect, with announcements of new providers and

services in our in-boxes daily.

1OPEN BANKING

By making it easier for challengers to enter the

market, and established players to create new

value propositions that extend their reach beyond

their walls, open banking is designed to increase

competition within the industry, which for so long has

been dominated by just a few big names.

THE U.S. AND BEYOND

The banking sector in the U.S. is a much larger, more

complex and competitive system than in the European

Union and U.K. While additional regulations seem

unlikely in the current political environment, FinTechs

have leveraged APIs and screen-scraping technology

for years to enable personal financial management

software and present bill details on bank websites.

To date, however, these connections have been used

primarily to share information rather than to transfer

funds. FinTechs like Mint.com (now owned by Intuit)

pioneered the concept of independent financial apps

that aggregate various bank accounts and credit cards

to provide consumers with a 360-degree view of their

finances and the ability to compare various banking

products.

Source: McKinsey Payments Practice

In the U.S., large banks are striking data-sharing deals with individual partners in a departure from the aggregator model. Examples include Chase’s partnership with Intuit and Wells Fargo’s partnership with Xero and Finicity.

In East Africa, new under-writing models are emerging from access to alternative sources of data, like mobile phone usage. Examples include M-Shwari, Tala and Branch.

In South and Southeast Asia, FinTechs are experiencing strong growth around APIs and data sharing. Examples include mobile wallet growth in India after demonetization and formal FinTech governance at the Monetary Authority of Singapore.

New digital finance ecosystems (e.g., WeChat, AliPay) are emerging in China, based on data-sharing capabilities.

In the European Union and the United Kingdom, PSD2 and the Open Banking Initiative are giving more control to the customer over personal account data. Digital banks such as N26 and Fidor, and digital lenders (e.g., Klarna) are seeking to reinvent banking.

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In Australia, the government recently released the

findings of its review into open banking. The report

concludes that an open banking system in Australia

should be customer-focused, efficient and fair,

encourage competition, and create opportunities for

new ideas and businesses to emerge and grow.

Monitoring the success or failure of the system

through a U.S. lens will be interesting given that

the move to open in the U.S. is not mandated by

regulation. Having been introduced as a means to

break down the competitive advantages that banks

have long enjoyed, open banking will undoubtedly

support an emerging market of new third-party

products and services, and increase competition

for banks to create net-new value propositions and

offerings.

OPEN BANKING FACILITATES BIG DATA USE BY

FINANCIAL INSTITUTIONS

Data is fast becoming the most valuable asset for all

financial institutions in the race to bring new services

to market, compete effectively and stay one step

ahead of growing regulatory pressures. In addition, the

proliferation of connected devices (e.g., the Internet of

Things) has allowed data to be generated, collected,

stored, processed and used at unprecedented rates.

Big Data encompasses not only the transactional data

but also the ability to process and analyze metadata

to unlock potential income-generating insights by

revealing patterns or correlations to predict future

events. The latter holds the greatest promise for

financial institutions, as there is more scope for value-

added, revenue-generating services to be developed.

Financial services are inundated with data and

products of all kinds, but when properly applied, Big

Data and analytics can positively impact a variety of

services, including:

• Segmenting customers

• Customer loyalty management (including monitoring

consumer sentiment towards products and

institutions)

• Creditworthiness assessments

• Market segmentation and campaign targeting

• Dynamic pricing

• Underwriting risk, fraud prevention and anti-money

laundering

• Personalized experience

• Tailored individualized offerings, incentives and

rewards

The impact of regulations such as PSD2, and

continued compression of interchange fees, means

that issuing and acquiring institutions in particular

need to look at other forms of revenue growth as

traditional revenue streams are threatened. PSD2

eases the path for new entrants moving into the

market with digital wallet and banking solutions that

will further threaten bank margins and lure customers

away. Also, there is evidence of an increasing number

of cooperation agreements/joint ventures between

different actors, including non-financial/non-regulated

actors for the use of Big Data (e.g., the recent Intuit

data sharing partnerships with Wells Fargo, Chase,

Lloyds and HSBC).

While financial institutions have always used data,

the type and sources of data, as well as the use of

data analytics tools, is growing exponentially. The

penetration of technology-driven applications in

almost every segment of the value chain of the

financial services sector has accelerated the pace of

change at a remarkable rate. The Payments Systems

Regulator (PSR) in the U.K. recently examined how

payments data is currently collected and processed

in a typical transaction involving interbank payment

systems, card payment systems and ATM transactions.

The PSR identified a number of points in the

transaction chain where data could be used to add

value to commercial products or improve services. For

example, this could be done by:

• Selling the raw data itself to other entities

• Analyzing the data and generating insights

• Applying insights from the data

Various types of consumer data are collected and

used by firms. These include ID or contact details,

browsing history, log data, professional data, personal

interests, financial and payments data, consumer

complaints or queries, social network information,

driving and location data, information from store

cards/credit cards, data collected for suitability

assessments or data collected for creditworthiness

assessments. At the same time, it is important to stress

that data sources are expanding exponentially, and

certain institutions appear to already have access to

an increasing set of sources. In addition, it is widely

accepted that data obtained from connected devices

and sensors will be used more and more.

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As competitive and regulatory pressure intensifies

globally, financial institutions are fast realizing that

they need to transform their payment systems to drive

down costs and consolidate redundant functions. Add

2 REAL-TIME PAYMENTS

THE NATURE OF OPEN BANKING WILL CHANGE

THE NATURE OF COMPETITION

Retail customers tend to choose banks for relatively

arbitrary reasons, then stay with them for years.

According to the CMA in the U.K., only 3% of people

switch to a different bank each year, despite the

current account switch guarantee the government has

in place to help the transition. It’s still inconvenient,

perceived as admin-heavy and there is little in the

way of incentives to compensate. As a result, banks

haven’t had a reason to date to deliver better products

or lower prices, which in the end means that the

customer loses out.

However, banking solutions of the future will be

influenced by how they benefit the customer and meet

their evolving demands and preferences, as well as

the societal impacts these new services will have. If

one or more of the world’s IT giants decides to fully

enter the payments arena, utilizing its access to the

customer interface and customer data, the effects

could be profound. Google, Apple, Facebook, Amazon

and Alipay all have access to vast data on customer

behavior, needs, interests and movements, which

could instantly make them relevant in any customer

payments offering or journey.

Banks also have plenty of customer data but have

not made valuable use of it or harnessed its potential.

Among FinTechs, we may find brilliant ideas and new

concepts, but without the interface or data from a

significant customer base, it will be hard for them to

gain traction and scale.

Third-party players may themselves have diverse,

often structured, data sets as a result of the digital

services they provide. Yet they do not have the same

regulatory obligations imposed on banks to provide

access to third parties. Access to rich data, which

customers might have generated in a large variety of

digital firms, would allow financial firms to compete

on a level playing field and to better meet the

expectations of customers, regulators, policymakers

and supervisors.

In fact, the European Commission is already

considering a proposal to regulate platform-to-

business relationships as a first step towards

establishing transparency in the relationship between

online eCommerce platforms, social networks and app

stores with their business users. To address underlying

asymmetry issues in data access, the Commission may

also consider the development of requirements that

will oblige firms that are critical to the digital single

market to provide consumer and business data in real

time and in standardized formats, in much the same

way as the PSD2 requirements apply to payments

data for banks.

INNOVATE TO DIFFERENTIATE

For incumbents, the die has been cast. Many are

making important decisions to innovate and foster and

build partnerships. Given their large and relatively loyal

customer bases, banks have a significant advantage

in that they can leverage data to innovate, providing

better customer experiences built with partnerships.

A December 2017 survey by consultancy Accenture

found that merchants could “become the new face

of everyday financial transactions” in the PSD2

environment. As part of the study, Accenture surveyed

nearly 80 payment executives at large merchants

and banks across Europe to determine how they will

respond to PSD2. The research found that nearly

90% of the merchants surveyed will be able to plug in

directly to banks to obtain consumer information and

initiate payments by 2019.

Merchants also expect open banking to drive

significant in-store innovation. The APIs that

merchants cite most often as ones they plan to embed

into their existing POS channels (enabling consumers

to access information directly from the merchant)

are bank account balance display (cited by 67% of

respondents), payments initiation (63%) and bank

account transaction history (60%).

Sophisticated multi-national merchants stand to

gain considerably from the benefits of PSD2, open

banking and real-time payments. These corporations

can process millions of transactions per day globally

across multiple retail channels and currencies. The

standardization offered by PSD2 will considerably

improve straight-through processing rates. This applies

not only to the basic payments information, but also

to customer data that can be leveraged to develop

more tailored solutions.

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to this the consumer demand for speed, convenience

and simplicity with payments and it is clear why there

has been such a push to real-time payments around

the world.

Within a decade, real-time, 24x7 payments have

emerged as the main driver of innovation in payments,

and the technology has become the norm in many

parts of the world. Drivers of these payment schemes

vary; the U.K.’s scheme was a result of regulatory

pressure, while a commercial imperative (including

competition from telcos) drove developments in

the Nordic countries. Elsewhere, a mix of regulation

and commercial drivers has played a role. Payments

infrastructure upgrades now inevitably include a

real-time payments element. In the U.S., The Clearing

House has rolled out the country’s first new payments

system in 40 years — a clearing and settlement system

to support real-time payments. Similarly, the European

Banking Association’s RT1 pan-European SEPA Instant

Credit Transfer-based scheme went live in November

2017.

To provide ubiquity, real-time payments must support

all payment types — including P2P, B2B, B2C and

C2B. In the P2P instant payments sector, a consortium

of U.S. banks launched Zelle as a response to other

providers in the sector. National P2P schemes across

Europe (e.g., Swedish “Swish” and Norwegian “Vipps”)

are also gaining significant traction. All of this creates

great opportunity and choice for consumers but

adds complexity and additional layers of technology

that need to be supported by banks, businesses and

merchants.

THE BUSINESS CASE FOR REAL-TIME PAYMENTS

In practice, and in common with most if not all

infrastructure developments, the business case for

real-time payments will be realized over the long

rather than short term. While connectivity to real-time

schemes is relatively straightforward, the demands

of real-time processing touch many aspects of the

financial institution previously managed with batch

processes. While initial costs are mainly related

to integration and testing, the ongoing costs of

maintaining these links must be considered. The

fragmentation of real-time payments schemes is a

challenge, and interoperability between schemes will

become increasingly important as more are rolled out.

Steps are being taken to address this by the European

Automated Clearing House Association (EACHA),

which published an instant payments interoperability

framework that provides the technical basis for

interoperability between the different Euro instant

payments services. In addition, scheme operators

are working closely together to maintain standards

of consistency to eventually facilitate cross-border

interoperability.

Fragmentation across payment systems is also being

tackled. For example, the U.K.’s Payments Strategy

Forum proposed consolidating the country’s three

payment system operators — BACS, Cheque and

Credit Clearing Company, and Faster Payments — into

a single entity. The mandate has now passed to the

New Payment System Operator (NPSO), which will be

responsible for developing a payments architecture

that is simpler, more accessible and more responsive

to innovation.

In addition to the technical changes that will be

required to move to 24x7, real-time payments, banks

in particular will have to change operational processes.

Moving away from a batch payments environment

will be a challenge. Each bank must work out how

it will provide a 24x7 service, and crucially, how it

will manage liquidity, risk controls related to fraud,

sanctions and anti-money laundering. This will require

different skills, capabilities and management of data to

cope with a change that has many dimensions across

a bank’s business and technology environments.

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Banks are trying to build various features in real-time

payments systems to tackle the competition from non-

banks in different areas, including P2P, B2B, B2C and

C2B transactions. These services must also be fast,

secure and available around the clock.

Businesses can use real-time payments for functions

like hourly payroll disbursements and just-in-time

inventory management. Real-time payments enable

more data to be carried with the payment, which

facilitates improved reconciliation and reporting. As

mentioned above, this is where the real value lies.

Banks can offer enhanced services related to this data

and improve cash management services, including

more cost-effective options for speedy disbursements

of funds, which help businesses manage their liquidity

positions in the entire financial supply chain more

efficiently.

Banks can offer trusted real-time payments solutions

to merchant and corporate customers by enhancing

access channels for online and mobile devices. This

gives them an edge over non-banks in efforts to

attract more customers to use their service. In turn,

consumers can access real-time payments to purchase

from businesses. Where issues arise, refunds can

be credited back into consumers’ accounts quickly,

providing enhanced customer service levels.

LIQUIDITY MANAGEMENT FOR MERCHANTS

The growth of online commerce has also had an

impact on demand for real-time payments. Customers

used to unfettered access to the internet and the “one-

click” purchases of online shopping expect payment

choices when purchasing goods and services. There

is also the strong argument that real-time payments

greatly benefit small- and medium-sized enterprises

by freeing up cash flow, especially when coupled with

eInvoicing. In addition to payments assurance and

lower fees for transactions, many small businesses

and large merchants alike are looking at real-time

payments to enhance their cash flow management,

reduce fraud activity and provide incremental value to

their customers.

Crucially for merchants, accepting credit card

payments is costly. Real-time payments, however,

are a much less costly option and do not penalize

the merchant, who is essentially paying for customer

acquisition.

Bank transfers, rather than credit card use, may be

encouraged in the future as merchants grapple with

fraud, authentication and data security issues. This

cuts out the middle man, provides direct access to

valuable transaction data and may even lead to a

better relationship with customers as a reduction in

credit card fees allows for reduced pricing for those

willing to forgo their cards.

Ultimately, real-time payments act as a springboard

for innovation — mobile, eInvoicing and eCommerce

payment solutions are all enabled by real-time

payments systems. At a time when brick-and-mortar

merchants around the world are struggling against

increased online competition, the impact of real-time

payments cannot be understated.

ENCOURAGING NEW ENTRANTS TO THE MARKET

Technological advancement has created opportunities

for non-banks to enter certain areas in payments

where banks have often not played a role. Consider

the payments value chain, which can be broadly

divided into five phases: pre-transaction, authorization,

clearing, settlement and post-transaction. Non-banks

have increased their presence in all phases of the

payments value chain except the settlement phase,

which is still core to banks’ activity.

A prime example is PayPal, where a person can store

credit card information and other details by opening

an account. Each time the person wants to transfer

money or carry out an eCommerce transaction, they

can do so using their PayPal account and password,

without keying in credit card details. There is also no

need to go to a bank website for initiating a payment;

PayPal completes the authorization and settlement

offline for the customer.

Another example is proximity payment, like Apple

Pay, which lets Apple devices wirelessly communicate

with point-of-sale (POS) systems using near-field

communication (NFC), a dedicated chip that stores

encrypted payments information (known as the secure

element), and Apple’s Touch ID and Passbook.

However, while the use of alternative payments is on

the rise, they also have several shortcomings. Although

they are simple to use and have funds verification, they

are expensive and settlement can take several days.

In addition, since accounts are funded by account

payments or through an automated clearing house

(ACH), this payments method relies on traditional

payment networks to operate. Card payments are

quicker and have positive fund verification but are

also costly, and businesses are hindered by

government regulations. ACH payments are

inexpensive and scalable, but ACH networks lack

instant fund verification and settlement can take days,

increasing the risk of non-payments for merchants and

other billers.

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services, products and channels, but also in pricing),

partner with intermediaries, evolve brand and image,

adjust the risk appetite and integrate risk with finance,

find new and affordable sources of capital and

liquidity, and concentrate on business lines that are

core to the company.

All business units need the right IT support, but

expense is an inhibitor, and market and regulatory

changes are additional complicating factors. Banks

that have recently undergone mergers have particular

problems in integrating disparate systems into one

“ready-for-the-future” system. One bank’s meltdown of

its new IT system in April 2018 locked out two million

customers from online and mobile bank accounts for

over a month before the bank could get a grip on

the problem. Only by drafting in a team of experts

from IBM, recruiting 1,800 additional employees and

redeploying 700 staff to customer support roles,

was the bank able to get the situation under control.

Around 26,000 customers have since switched bank

accounts and the bank has been left with a bill of more

than $230 million for customer compensation and

waived overdraft fees and interest charges, and now

faces the prospect of hefty regulatory fines.

There are two key stages in IT modernization. The

first is to integrate the legacy systems and software,

which is where the bank in the above example failed.

The second is to devise new IT architectures, buy in or

create new software, and embrace innovations such as

cloud computing.

Many banks still have their products, channels and

lines of business in silos, or they are only partially

integrated. Non-integrated systems prevent them

from having a critical enterprise-wide view, hamper

organization-wide efforts to improve customer

experience and impair the ability to adequately

monitor operational activities. To break the cycle,

banks need to introduce applications that are service-

oriented and standards-based, which are easier to

integrate with other applications.

In particular, cloud adoption allows for a reduction

in the need for software and additional computing

power, thus saving on capital investment and reducing

IT complexity. There is no need to maintain or update

hardware, software or services, as the provider does

this. The services provided are generally better, faster,

more flexible, more scalable and more reliable because

they are provided by dedicated organizations that are

experts in delivery of payments infrastructure.

The need to become and remain competitive is a

serious challenge, especially for the banking industry,

which is saturated with providers, products and

services — particularly in the retail, small business,

corporate and wealth management sectors. Even

investment bankers are up against stiff competition

from digital rivals. The financial services market has

always been a competitive business, but established

players are finding it even harder today to differentiate

themselves from the steady trickle of new entrants.

PUTTING CUSTOMERS AT THE CENTER OF

EVERYTHING

There are several ways for banks to become more

customer-centric. They include collecting more

accurate and timely customer information (and

managing it better); improving operational efficiency;

providing a more attentive, personalized service;

integrating multiple delivery channels and bringing

new services to market more rapidly.

Even though customers regard quality of service

as the most important aspect of their banking

experience, they also value relevant, competitively

priced and innovative products, and effective delivery

channels. The challenge for banks, therefore, is to keep

abreast of developments in these two areas.

To meet the multitude of challenges they face,

banks need to modernize their business strategies

and operating models. There are a number of

modernization strategies to consider: become more

customer-centric, update products and channels,

differentiate from the competition (not just in terms of

3 MANAGING COMPLEXITY AND MODERNIZATION

This builds the case for real-time payments, where

customers have direct control over their money and

there are not pools of unused liquidity. Consumers

and businesses pay directly from their accounts.

This payments method is inexpensive, quick,

secure and has instant positive funds verification

and confirmation. It helps merchants reduce their

interchange costs, and helps banks maintain their

direct relationships with customers. Most importantly,

it is aligned with consumer expectations in today’s

immediate access, “always on” world.

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REGULATORY COMPLIANCE

Banks must apply new and innovative measures to

prevent and detect fraud, not only to cut down on

losses, but also to satisfy the authorities that they

are not encouraging fraudsters. These measures

can only be carried out effectively if they have

fraud management software with a wide range of

features, including real-time detection and correlation

capabilities, sophisticated behavior detection and

analytics.

With the entry into force of all accompanying

guidelines and the regulatory technical standards for

strong customer authentication, banks will be subject

to the operationalized PSD2 by the end of 2018,

obliging them to provide customer data to all licensed

competitors, in digital form and free of charge. Big

techs, on the other hand, have to observe the GDPR

only and will retain economic sovereignty over the

personal data of their customers.

Banks will also need appropriate anti-money

laundering and combating the funding of terrorism

(CFT) monitoring processes in place if they process

transactions on behalf of FinTech companies’

customers. If the customer makes payments with a

bank card or account, the bank currently has some

level of responsibility for authenticating the customer

and may be responsible for covering fraudulent

transactions under several regulatory regimes.

The higher level of automation and distribution of

the product or service among banks and FinTech

companies can result in less transparency on how

transactions are executed and who has compliance

responsibilities. This can increase conduct risk for

banks, as they may be held accountable for the

actions of FinTech partners if a customer suffers a loss

or compliance requirements are not met.

ARTIFICIAL INTELLIGENCE/MACHINE LEARNING/

ADVANCED DATA ANALYTICS

Artificial intelligence makes advanced analytical

tools that, by leveraging the capability to process

large volumes of data, support innovative solutions

for business needs. This capability enables the

development of multi-channel customer access,

increased self-service by customers, ability to

gain greater insight into customer needs and the

provision of more tailored or customized services.

Many FinTechs have leveraged these capabilities to

provide data collection, aggregation and storage

services, advanced data analytics and personal finance

management directly to customers. In modernizing

and digitizing incumbent banks, most of these services

support scenarios where the use of advanced data

analytics to research customer needs provides real-

time service delivery, enhances risk management and

can significantly improve the bottom line. FinTechs

based on data aggregation business models monetize

customer data and use this data aggregation to gain

an in-depth knowledge of their users (through search

history, personal data and preferences shared on social

media, consumption and spending habits, etc.) and

tend to compete directly with banks for ownership of

the customer relationship.

MERCHANT INVESTMENTS

REQUIRED FOR MODERNIZATION

The pace of change in the payments industry is rapid,

and merchants must continue to develop their core

payments infrastructure to remain competitive and

position themselves for growth. Modernizing the

middle and back office is certainly important, but

this modernization process must also extend to fraud

solutions and omni-channel payment options.

The term omni-channel may be overused, but few

would deny that a coherent omni-channel strategy

is a fundamental business aim for forward-thinking

merchants. Today’s customers are looking for seamless

shopping experiences, regardless of whether they are

browsing the web on their tablets, using a merchant’s

app on their smartphone or visiting the retailer’s local

branch. In a networked world, consumers have access

to a huge amount of information and enjoy an equally

vast selection pool. As a result, merchants need to

be aware of what consumers expect and improve

processes accordingly. Increasingly, an omni-channel

commerce strategy that combines both online and

offline channels is vital to building a truly seamless

shopping experience.

Enabling mobile payments is a natural part of the

customer “digital experience factor” and not just a

cost of doing business. Advanced merchants and

corporates are now realizing that a digital payments

infrastructure is vital, not just for influencing

conversions and returns, but for actually reducing

costs of operation and creating new consumer

insights.

In addition, as merchants start providing augmented

reality (AR) assisted shopping experiences, they will

likely look for an AR-integrated payments gateway

that delivers a superior customer experience, adding

further complexity to their already burgeoning IT

deployments.

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class and favorable government policies (e.g., India).

Regulation is also working on loosening the grip of

banks and opening the market to more competition,

although we may see more supervision, or even

regulation, of platform companies as they become

ever more critical to consumers and businesses alike.

For traditional banks and even platform companies,

the need to provide real-time, cross-border, universal

payments has led to more outsourcing due to tie-ups.

THE EXPANSION OF ASIAN GIANTS

AROUND THE GLOBE

Alipay, Tencent, Paytm and PayU have accelerated

the shift to digital payments in emerging markets.

Alipay and Tenpay are dominant names in China that

are aggressively expanding overseas, while PayU

and Paytm build new ecosystems amid digitalization

of cash in emerging markets. Alipay’s role as the

payments infrastructure of Alibaba (and Ant

Financial’s ecosystem) differentiates it as being more

commercially relevant than competitive offerings.

Alipay has pushed its offline applications into more

use cases, including public transportation and small

offline merchants (with free QR-code payment) and

has payment partnerships in over 110 countries.

Tenpay is Tencent’s third-party payments platform.

It provides technical infrastructure support for

WeChat Pay and QQ Wallet, two products based

on Tencent’s dominant social and communication

platforms, WeChat and QQ. Tenpay has a 25%1 share

in China’s third-party payments market, second only

to Alipay. Tenpay’s key advantage lies in the ubiquity

of Tencent’s social and communication assets, which

underpins its strong performance in mobile and offline

payments.

Chinese consumers that use Alipay or Tenpay do not

have to pay with a credit card. These services provide

interest-bearing escrow deposit accounts that allow

consumers to circumvent the card networks entirely.

If Alipay or Tenpay were to make significant inroads

in the U.S. and Europe, this could be a competitive

threat to Visa and Mastercard. However, these Chinese

payment providers would have to address three main

obstacles:

• Receiving bank-related regulatory approvals to offer

deposit accounts in each country of operation

• Providing additional incentives to win consumer

wallet share, as card issuers (particularly in the

United States) offer more compelling rewards

programs than those in China

Digitalization and standards such as ISO 20022 will

inevitably pull all parts of the financial community

together. However, fragmentation and legacy will still

be a limiting factor to globality for years to come.

Alipay, Amazon, etc., because of their relative size and

reach, impose their own globality conditions onto the

regions of the world in which they operate. In the case

of Alipay, this allows Chinese tourists traveling abroad

to use their payment apps as they would in their home

market. Similarly, Amazon creates its own ecosystem

of seller communities with a uniform distribution and

payments system so that they can operate across the

world. Amazon Web Services (AWS) is also providing

the cloud infrastructure for a high portion of the new

FinTechs that are challenging traditional operating

models, especially those based on international money

transfers, cryptocurrencies, wealth management,

insurance, micro finance and aggregation services.

By contrast, banks, credit card companies and

traditional banks have built around themselves a

complex web of island standards, networks and

operating processes, either intentionally or because of

regulation, that have until recently actively inhibited

globality. This has helped FinTechs, many of which

have based their businesses on breaking down these

silos and barriers (e.g., TransferWise and Revolut).

A decade after the great financial crisis, banks still

struggle with innovation and speed, but they can

either create innovation themselves or do so by

partnering or acquiring new entrants. However, when

the new entrant is a big tech, the equation changes

as the likes of Google, Amazon, Facebook and Apple

come to the party with pre-existing scale and client

reach, sometimes greater than the banks themselves.

These internet-based platform companies have

captured an ever-increasing share of consumers’

time and attention. They also view payments and

financial services not as an end, but as a tool to

further enhance client stickiness, and they monetize

via advertising, eCommerce or other services (such

as AWS). And when these platform companies have

gone into payments and finance, mainly in emerging

markets so far, they have gone big. Finance is being

re-imagined and re-created in emerging markets with

the proliferation of mobile platforms, a growing middle

4GLOBALITY

11

• Achieving high levels of merchant acceptance

needed to make these forms of payment as

convenient as cards are today

INNOVATIVE ALTERNATIVES TO CARDS

Swedish firm Klarna is simplifying online checkout

by expanding the traditional payments gateway to

include consumer credit. With Klarna, the shopper

no longer has to provide payments information at

checkout and can receive the product before paying

for it. Klarna also offers installment loans to customers

during checkout. The fact that consumers pay after

delivery is a key aspect of Klarna’s appeal, which can

facilitate its growth. As more online shopping is done

on the phone, consumers are demanding easier and

more secure checkout. With Klarna, consumers do not

need to provide sensitive payments information when

purchasing items in crowded public places and do not

need to remember another username and password.

Second, shoppers do not have to pay until the

goods are delivered, obviating delivery and quality

assurance concerns — which is especially important

when shopping across national borders. Again, Klarna

appears focused on international growth, making two

acquisitions to gain scale in Germany and launching in

the U.S. market two years ago. Klarna also streamlines

the payments process for merchants by providing

a single integrated solution with a single technical

integration, one agreement and one customer support

team. Its platform partners include the likes of Shopify.

Despite much publicity upon launch, Apple Pay,

Samsung Pay and Android Pay have been slower to

gain traction. Apple Pay has the highest penetration

(in part because it launched nearly a year earlier) and

is seeing the most growth (albeit off a small base),

with transaction volume rising as the service expands

its merchant and user bases. Despite this, one-third of

the biggest 100 merchants in the U.S. do not accept

Apple Pay (including merchants like Walmart, which

has opted for its own digital wallet solution, Walmart

Pay). Also, consumers fail to see a clear advantage

in terms of ease of use relative to traditional cards

(particularly contactless) with few or no additional

incentives to use mobile wallets.

1 Source: Goldman Sachs, Payment Ecosystems, August 2017

By contrast, consumers choose their mode of payment

based on incentives, which has been the case with

credit card rewards programs driving incremental

credit card spend, and loyalty programs linked to

digital wallets at merchants such as Starbucks and

Dunkin’ Donuts driving mobile app usage.

THE NEED FOR FRICTIONLESS

UNIVERSAL PAYMENTS

With so many payment options, differing regulatory

regimes and the unpredictability of FinTech disruptors,

frictionless payments have dented the lucrative lines

of businesses that were once exclusive to traditional

banks. Convenience and speed have become

consumers’ universal baseline expectation for their

payments experience, as they expect to be able to

pay for just about anything, anytime, anywhere. They

can order ahead and pay at restaurants, request a ride

home in a matter of minutes or purchase a last-minute

gift to arrive promptly on their doorstep that same day.

Payments technology continues to rapidly evolve to

meet these increasingly sophisticated and immediate

consumer demands. New innovations like voice

payments, contactless cards and wearables are

intended to make electronic payments even easier

and more frictionless. For all players, this will require

new strategies that leverage existing assets married

with new technologies to deliver experiences that

define consumers’ behaviors, all while being open to

partnerships once believed unthinkable. The payments

ecosystem has grown far beyond banks or traditional

processors to include merchants, payment gateways

and just about any organization that can facilitate

payment for goods and services via their own app.

Today’s consumers expect any mobile, social or

physical commerce experience to seamlessly integrate

with their smartphone at kiosks, ATMs or online.

Constant introductions of new payment technologies

require increased agility from all payment providers

that want to maintain a competitive advantage.

Above all, it is important to recognize that time is a

precious currency and acknowledge that consumer

convenience, throughout history, has driven

disintermediation and defined innovation across all

sectors.

12

ACI Worldwide®, the Universal Payments®

(UP®) company, powers electronic

payments for more than 5,100 organizations

around the world. More than 1,000 of

the largest financial institutions and

intermediaries, as well as thousands of

global merchants, rely on ACI® to execute

$14 trillion each day in payments and

securities. In addition, myriad organizations

utilize our electronic bill presentment

and payment services. Through our

comprehensive suite of software solutions

delivered on customers’ premises or

through ACI’s private cloud, we provide

real-time, immediate payments capabilities

and enable the industry’s most complete

omni-channel payments experience.

Americas +1 402 390 7600 Asia Pacific +65 6334 4843 Europe, Middle East, Africa +44 (0) 1923 816393

© Copyright ACI Worldwide, Inc. 2018 ACI, ACI Worldwide, ACI Payment Systems, the ACI logo, ACI Universal Payments, UP, the UP logo, ReD, PAY.ON and all ACI product names are trademarks or registered trademarks of ACI Worldwide, Inc., or one of its subsidiaries, in the United States, other countries or both. Other parties’ trademarks referenced are the property of their respective owners.

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