PAYMENTS PLUS

FALL 2018

FALL 2018

A NEW ERA

Welcome to the inaugural issue of Payments Plus. On behalf of Oliver Wyman, I am delighted to share a sample of perspectives drawn from our client work across the industry.

It’s hard to imagine a more exciting time to be in the payments business. “New” is the lone constant across the board—new entrants, new technologies, and new business models. Whether you work for a financial institution, a merchant company, a payments provider (such as a network or processor), a challenger firm, or a private equity fund investing in the sector, the dynamics impacting your business today are profound.

Against this backdrop, we are working with clients across the value chain to drive top-line growth, manage risk, and strengthen operating models. The examples highlighted in this issue show how we are deploying our capabilities to improve our clients’ competitive advantage.

As always, we welcome your thoughts, questions and feedback.

Best wishes,

Tony HayesPartner, Head of Global Payments Team

PAYMENTS PLUS/ INTRODUCTION

PAYMENTS PLUS / MARKET DEVELOPMENTS

BIG DATA AND ADVANCED ANALYTICS

FALL 2018

+ CREDIT CARD + MACHINE LEARNING

Firms in the payments arena are investing aggressively in capabilities that help them glean useful insights from transaction-level data. Machine-learning techniques are fast becoming the norm in applications like transaction fraud, for example.

One key challenge for credit card issuers, however, is the requirement to explain to consumers the customer-level decisions they’re making, which limits the use of machine learning techniques. Leading issuers are responding by integrating advanced methods such as stochastic gradient boosting and LASSO1 as intermediate steps, even in regulatory models, striking a good balance between interpretability and predictive power.

1. Least absolute shrinkage and selection operator

Oliver Wyman recently employed these approaches for a leading credit card issuer.

We developed account-level forecasting models for all P&L line items and built an integrated forecasting engine, with the eventual codebase implemented directly in the client environment. This enabled the issuer to generate insights with far more granularity than before, helping improve decisions ranging from new-account acquisition campaigns to cobrand-partner negotiations.

PAYMENTS PLUS / MARKET DEVELOPMENTS

DIGITAL IDENTITY AND AUTHENTI-CATION

FALL 2018

+ FRAUD PREVENTION + CUSTOMER AUTHENTICATION

Authenticating customers securely and efficiently is a significant challenge in the digital payments arena. Despite considerable effort and investment across industries, losses from stolen identities and credentials are high—more than $16 billion in the US alone—and rising.

Criminals are becoming increasingly sophisticated, driven in part by the growing prevalence of digital and self-service channels. At the same time, consumers demand a frictionless experience. The industry is looking for solutions that balance customer experience with enhanced security.

Oliver Wyman recently worked with various organizations to identify best practices and key opportunities in fraud prevention.

For one industry participant, we developed a differentiated digital proposition combining elements of ID proofing, multi-factor authen-tication, and risk-based scoring. For several banks, we benchmarked their fraud strategy, governance, risk ID, and analytics capabilities and identified best practices.

We see significant opportunity in enhancing fraud capabilities for digital payments, in ways that embed prevention, detection, and remediation activities seamlessly in customers’ daily interactions.

PAYMENTS PLUS / MARKET DEVELOPMENTS

NAVIGATING FINTECH INVESTMENT OPTIONS

FALL 2018

+ PRIVATE EQUITY FUND + MARKET DUE DILIGENCE

With billions of dollars being pumped into FinTech, it’s increasingly difficult for investors to determine where to place their best bets. To make matters trickier, global differences in regulations, revenue streams, and consumer behavior can favor different points within the payments value chain (issuers, acquirers, networks, banks, and transmitters).

Oliver Wyman recently worked with a large investment fund to deconstruct the global FinTech landscape and identify attractive opportunities. Our analysis identified the key markers of compelling investment opportunities in FinTech in general and payments in particular.

First and foremost, it is critical to focus on a narrow consumer or business need to drive interest and adoption. Other markers help separate the wheat from the chaff and find point solutions with the trust, technology, and capabilities to expand into financial services platforms. With these markers in mind, we helped the client analyze the payments value chain deeply across geographies to find opportunities for outsized returns.

PAYMENTS PLUS / MARKET DEVELOPMENTS

MERCHANTS EXPANDING INTO FINANCIAL SERVICES

FALL 2018

+ MERCHANT + GROWTH STRATEGY

As merchants continue to seek new and innovative ways to deepen customer relationships, many are expanding the suite of financial services they offer to customers.

For customers, the benefits of merchant-based financial services include greater convenience at checkout, the ability to stage payments to fit their needs, opportunities for greater discounts and rewards, and, in some cases, the ability to make a purchase at all. For merchants, offering new and enhanced financial services enables deeper relationships with customers, drives stronger loyalty, provides new sources of fee income, and creates new opportunities for core business sales, which can result in greater top-line revenue growth.

Oliver Wyman recently worked with several merchants to identify new and enhanced financial services they can offer to their customers. We found opportunities for enhanced cobrand offerings, point-of-sale lending products, working-capital lending products, tailored prepaid offerings, and more.

Of course, financial services is a mature market, so merchants trying to enter need to figure out which of these capabilities can amplify their unique value proposition. What works for one might not help another. We provide the tools merchants need to make the critical decisions necessary to seize these opportunities.

PAYMENTS PLUS / MARKET DEVELOPMENTS

THE FUTURE OF CASH AND ATMs

FALL 2018

+ CHANNEL STRATEGY + SCENARIO MODELING

There’s no question that card and digital payments are growing strongly, but how is this growth impacting consumers’ current and future use of cash? And, in turn, what is the expected future demand for the channels that handle cash, namely ATMs and bank branches?

There are two competing schools of thought, yielding radically different conclusions with respect to a bank’s channel strategy and capital investment plans. One view is that electronic payments will drive a significant shift away from cash, and this will enable a more asset-light physical distribution footprint. By contrast, the other side argues that cash will remain prevalent for the foreseeable future, and hence so will ATMs.

Oliver Wyman recently worked with a major bank to refresh its ATM channel strategy. Looking across millions of customers, we profiled the demand for ATM services, how this varies by customer segment, and how this has changed over time. With the bank’s leadership team, we analyzed different potential approaches to satisfy this demand, spanning bank-owned ATMs, third-party branded ATMs, and surcharge reimbursement, and the associated tradeoffs between customer experience and bank economics.

Our customer-centric lens moved the debate away from opinion and toward leveraging a robust fact base. We helped the bank shift focus from the ATM channel’s P&L toward approaches that maximize customer value.

PAYMENTS PLUS / INSIGHTS

MOBILE PAYMENTS

With smartphone penetration nearing ubiquity, the time may be right for the US to transition from using plastic cards to using mobile devices to make payments at the point of sale.

The launch of Apple Pay in October 2014 was seen as a potential tipping point, with broad adoption by the largest banks and growing merchant acceptance. Together with Google Pay and Samsung Pay, consumers can now load their payment credentials into essentially every phone in the market.

INSI

GH

TS OLIVER WYMAN DIGITAL & FASTER PAYMENTS STUDY

There are myriad views and forecasts about mobile payments, but most tend to lack analytical rigor or grounding in empirical facts.

Oliver Wyman’s Digital & Faster Payments Study collects data from a large, representative set of financial institutions on the most critical developments in mobile payments, ecommerce and faster/real-time payments.

Our 2018 data set includes 59 financial institutions, spanning everything from large national banks to regional and community banks and credit unions. Collectively these organizations represent approximately half of the entire banking market.

Oliver Wyman continuous-

ly invests in a broad range

of proprietary analysis to

develop new insights. Our

intellectual capital draws

from primary research with

consumers, small business-

es, issuers, and merchants,

as well as exclusive partner-

ships with a number of data

providers.

FALL 2018

STRONG GROWTH INCUSTOMER ADOPTION…

Across all three major providers, the number of customers provisioning a payment card into a mobile wallet is doubling year-on-year

…BUT STILL A VERY SMALL SHARE OF PAYMENTS VOLUME

TRANSACTION MIX FOR A TYPICAL CARD ISSUER

Despite strong growth, mobile payments remain a very small share of total spend

Mobile payment transactions, with debit cards, in full year 2017

Paid by financial institutions to Apple in Apple Pay fees in 2017

~80% of all tokenized credentials are in Apple Pay wallets

Card-not-presentCard present

Mobile pay

Mobile payments at point of sale are less than 0.2% of total card spend

~400 MM~$3 MM est.

3.5%

6.3%

12.2%

0.2%0.8%1.5%

0.2%0.6%1.3%

2015 2016 2017

Apple Pay Samsung Pay Google Pay

CHASE CITI

OUTSTANDINGS

Outstandings ($BN) 145 137YoY growth 3.6% 4.5%

Market share 14.8% 14.0%

CREDIT QUALITY

Annualized net charge offs 3.26% 3.74% YoY change 0.25 % 0.17 %

Percent subprime 14.6% 33.0%

SPEND VOLUME

Quarterly spend ($BN) 174 108 YoY growth 11.0% 6.8%

Market share 18.8% 11.7%

REWARDS COST

Rewards cost (bp spend) 184 181YoY change 12 8

DISCLOSED OR ESTIMATED FINANCIALS

Revenue ($BN) - 3.7Pre-tax income ($BN) - 0.9

Pre-tax ROA - 2.64%

YoY change - 0.48%

US CREDIT CARD ISSUER METRICS, 2018 Q2

ME

TRIC

SOliver Wyman tracks the

performance of payments

organizations across mul-

tiple metrics. In this issue,

we show the performance

of the largest US credit

card issuers.

PAYMENTS PLUS / METRICS

NOTES: • Some data points are inferred or calculated using Oliver Wyman proprietary analysis • Fields are left blank where insufficient data were available to calculate a reliable metric

FALL 2018

Metrics are for consumer credit cards, corporate cards, and private label cards. All information is derived from publicly disclosed data.

CAPITAL ONEBANK OF AMERICA

AMERICAN EXPRESS* DISCOVER WELLS FARGO U.S. BANK BARCLAYS

101 95 78 68 37 31 25 8.5% 4.4% 12.1% 9.7% 3.9% 5.9% 1.3%

10.3% 9.7% 8.0% 6.9% 3.7% 3.1% 2.5%

4.72% 3.16% 2.40% 3.33% 3.60% 3.31% 4.30% 0.39% 0.30% 0.43% 0.40% 0.07% 0.00% 0.78%

32.0% 13.5% - 18.0% 21.1% - -

89 67 195 35 19 41 -

17.4% 8.4% 10.0% 9.0% 7.3% 8.3% -

9.6% 7.2% 21.1% 3.8% 2.1% 4.4% -

113 195 - 131 174 130 -

6 0 - 11 15 0 -

3.9 2.7 3.7 2.1 1.3 1.0 0.91.1 0.6 0.9 0.8 0.5 0.3 0.2

4.36% 2.58% 5.34% 4.99% 5.57% 3.37% 3.30%

0.37% 0.34% 0.52% 0.80% 0.64% 0.11% 0.37%

* For American Express, estimated financials are for consumer only (whereas all other metrics are for consumer and corporate cards). Note: 2018Q1 is used instead of 2018Q2 due to reporting limitations

EV

ENTS

MERCHANT ADVISORY GROUP 2018 ANNUAL CONFERENCE

The Merchant Advisory Group (MAG) is the premier association

for merchants to discuss payments topics

Beth Costa and Rob Mau will host clients and

debut new white papers

PAYTHINK

Tony Hayes will moderate a keynote panel discussion on

“Insights & Perspectives From Industry Leaders in Debit”

as well as the annual “Network Showcase”

Cosimo Schiavone will chair the conference’s fraud

and security track

INSURETECH CONNECT

Oliver Wyman presents InsureTech Connect, the leading FinTech event for the insurance market

Rick Chavez will deliver the opening keynote, addressing new digital business models, payment applications and provider/FinTech partnerships

THE MOST POWERFUL WOMEN IN BANKING

Oliver Wyman is proud to honor some of its top female consultants

and applauds the accomplishments of leaders across the industry

1-3

Las Vegas

12-14

Denver

24-26

Austin

4

New York

SEP

TEM

BE

RO

CTO

BE

R

PAYMENTS PLUS / EVENTS

FALL 2018

OC

TOB

ER

NO

VE

MB

ER

28-30

Nashville

21-24

Las Vegas

13-14

New York

29-30

New York

MONEY 20/20

Aaron Fine is a featured speaker for “FinTech’s Unsolved Mysteries: New Revenue Models Beyond Credit”

Tony Hayes will moderate an Oxford-style debate: “The Blockchain Will Replace Payments Platforms”

Rob Mau will moderate a panel on “The Uberization of Business Payments”

Elizabeth St-Onge will participate on a panel, moderated by WNet, on "Women in Payments"

CITI’S 2018 FINANCIAL TECHNOLOGY CONFERENCE

Tony Hayes will discuss developments in

FinTech and bank strategies

SMALL BIZ

Vivian Merker will moderate a keynote panel with bank executives

on the future of small business banking, covering how different

financial institutions are managing toward a digital future across

deposits, lending, payments, and relationship managers

BLOCK|FS

Inderpreet Batra will lead a session on using blockchain

technology to capture new opportunities

Making Payments Work for You: How Merchants Can Optimize Payments for Growth

US SHOPPERS’ APPETITE FOR DISCOUNTERSONE YEAR IN, SHOPPERS PLEASANTLY SURPRISED BY LIDL’S OFFER

US Shoppers' Appetite for Discounters

White Paper

The Appropriate Use of Customer Data in Financial Services

September 2018

Prepared in collaboration with Oliver Wyman

The Appropriate Use of Customer Data in Financial Services (in collaboration with the World Economic Forum)

PAYMENTS PLUS / READING

Oliver Wyman publishes

a broad range of perspec-

tives and points of view

across industries. All of our

reports can be accessed on

our website.

Click on the image to view

the complete report, or

download via our website

at www.oliverwyman.com.

REP

OR

TS

Cryptocurrencies and Public Policy: Key Questions and Answers

FALL 2018

1

ENGAGING THE WORKFORCE

IN DIGITAL TRANSFORMATION

A NEW MODEL TO ENABLE YOUR DIGITAL STRATEGY

Engaging the Workforce in Digital Transformation: A New Model To Enable Your Digital Strategy

Authors

Ashley Cunnington, Partner, London Rene Fischer, Partner, Frankfurt Oliver Plant, Principal, LondonPhilipp Bulis, Engagement Manager, Berlin

THE CURRENT ACCOUNT CONUNDRUM FOLLOW THE MONEY

The Current Account Conundrum: Follow the Money

Set the Pace: A New Method for Breakthrough Process Improvement

Winner Takes All in the Battle for E-Wallet Supremacy

Preparing for a Cyber Attack

Next Generation KYC: Optimizing Customer Experience While Improving Efficiency

CEL

ENT

PAYMENTS PLUS / READING

Celent, a division of Oliver

Wyman, is the leading sub-

scription research and advi-

sory firm focused on finan-

cial services technology.

A REAL-TIME HUB FOR A REAL-TIME EVERYTHING FUTURE

Gareth Lodge 14 March 2018

A Real-Time Hub for a Real-Time Everything Future

ADDRESSING THE CARDSLEGACY CHALLENGETOP 10 APPROACHES

Zilvinas BareisisJuly 2018

Addressing the Cards Legacy Challenge: Top 10 Approaches

US PAYMENTS IN THE CLOUD A RESPONSE TO UNCERTAIN TIMES

Gareth Lodge 18 April 2018

US Payments in the Cloud: A Response to Uncertain Times

REPLACING CARDS WITH ACCOUNT-TO-ACCOUNT PAYMENTS FOR SHOPPING HOLD YOUR HORSES

Zilvinas Bareisis August 2018

Replacing Cards with Account-To-Account Payments for Shopping: Hold Your Horses

PAYMENTS + BRAND

PAYMENTS + DIGITAL

PAYMENTS + STRATEGY

PAYMENTS + OPERATIONS

PAYMENTS + TECHNOLOGY

PAYMENTS + PARTNERSHIPS

PAYMENTS + DUE DILIGENCE

PAYMENTS + DATA & ANALYTICS

PAYMENTS + RISK MANAGEMENT

PAYMENTS + CUSTOMER EXPERIENCE

PAYMENTS + ORGANIZATIONAL EFFECTIVENESS

Oliver Wyman is a global leader in management consulting with offices in more than 50 cities across 26 countries

Oliver Wyman is a wholly owned subsidiary of Marsh & McLennan Companies [NYSE: MMC].

Email: payments@oliverwyman.com

Web: www.oliverwyman.com