© CELENT

Will Retailers Ignite Mobile Payments at the POS? ATM, Debit and Prepaid Forum, 2013

October 22, 2013

Zilvinas Bareisis, Senior Analyst, Celent

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Selected Examples of Recent Payments Research

• Mobile and Online Payments:

• Digital Wallets: Crossing the Chasm Between Online and Offline

Payments

• Managing Digital Payments Risks: A Regulatory Perspective

• What’s In Your Mobile Wallet?

• Would OBeP be iDEAL for the UK Market?

• Innovation and Trends:

• The Rise of the New Bank Account? The Quest for Transactional

Account Primacy

• Fin Tech Innovations: Reporting from FinovateEurope 2013

• Top Trends in Payments: A Year in Review (2013 Edition)

• Cards:

• In Search of a 3rd European Card Scheme: Time to Move On

• Credit Card Customer Retention: A Benchmarking Study

• Durbin Second-Order Effects (Series of 6 reports)

• Offers and Rewards:

• Using Data to Create Value for All Customers: A Case Study of

Bank of America’s BankAmeriDeals Program

• Can Card Issuers Turn Loyalty Program Costs into Revenues? A

Case for MFR Programs

• Selecting an MFR Platform. An In-depth Analysis of MFR Vendors

London-based Senior Analyst, Banking, Celent

Research focus on retail payments

Ex-management consultant for >14 years with

Oliver Wyman, Diamond and other leading firms

Leading research and advisory firm exclusively

for the financial services industry

Dedicated to helping FIs and vendors formulate

comprehensive business and technology

strategies

Global analyst coverage of the major FS

verticals: banking, insurance and securities &

investments

A division of Oliver Wyman

Leading specialized global consulting firm

~ 3500 staff worldwide, first-class client

references across multiple industry sectors

Distinct approach characterised by deep

specialisation and rigorous fact-based analysis

Zilvinas Bareisis

Introduction – Zilvinas Bareisis, Celent

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1. Mobile Payments: A Progress Report

2. Can Retailer Apps Ignite Mobile Payments at the POS?

3. Implications for Card Issuers

Contents

Mobile Payments: A Progress Report Section 1

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Digital technologies are re-shaping not just payments, but the entire retailing sector in the developed markets

• While physical store retailing still dominates in all markets, e-commerce is the fastest growing

segment, as people are increasingly buying goods and services online through a variety of

devices – laptops, tablets and mobile phones.

• Furthermore, digital is changing not just payments, but the entire retailing value chain – from

product discovery to research to price comparison to stock checking to paying.

• As a result, many talk about “online-offline convergence” or “omni-channel retailing” as

customers research and order goods online but pick them up in store, or discover things in the

stores, but check prices and order online. However, payments to-date have mostly struggled

to deliver this converged experience.

• The point of sale (POS) is becoming point of interaction (POI) with richer services delivered

from the cloud. It is also becoming more mobile or disappearing altogether, as “check-out” is

being replaced by “check-in” with payment experience fading into the background.

• The retail payments space has become incredibly complex with different types of players (e.g.

banks, issuers, mobile network operators, technology giants, start-ups, etc.) competing with

solutions based on various technologies (e.g. NFC, QR, cloud, etc.)

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Much of the focus in mobile payments so far has been on digital wallets and the “wallet war”

Main focus

at launch E-/ M-

commerce

Retail POS

v1.0

Payment credentials storage

Cloud

Secure

element on

the phone

(NFC)

Quick

Tap

Both

“Mobile

wallets”

?

?

Both

Digital wallets can be differentiated based on their initial focus (retail POS or e-/m-commerce)

and where they store payment credentials (phone SE or cloud)

However, mobile payments at the POS have so far failed to take off, both in Europe

and the US

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In Europe, we are observing two trends: ongoing efforts to push NFC and the emerging universal mobile payments solutions directly from a bank account

• Facilitate all types of retail payments

directly from the bank account via a

consistent user experience

– Payments at physical POS terminals

– Internet merchant payments

– P2P payments, ATM withdrawals, etc.

• Bypasses traditional card networks (e.g.

Visa, MasterCard, Amex)

• Implementations vary:

– Can be ‘pull’ (e.g. Poland’s IKO) or

‘push’ (e.g. UK’s Zapp)

– May use existing clearing & settlement

infrastructures (e.g. Faster Payments)

Mobile payments from a bank account NFC/ Contactless

Mobile

Payments at

the POS

(Europe)

• European banks continue to push

contactless; upgrading POS infrastructure

and issuing contactless cards

– Over 671,000 Visa contactless terminals

– 51 million contactless Visa cards in

circulation in Europe; one in four Visa

cards in the UK are now contactless.

– PayPass accounts for 10% of total

MasterCard transactions in Poland

• MNOs very active in promoting NFC

– Deals between MNOs and Visa/ MC

– MNO JV’s (e.g. Weve in the UK)

– Various partnerships between MNOs,

banks and schemes in Spain, Italy,

Germany, and most other countries

• Will the banks and MNOs ever learn to

work together?

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Case Study: Zapp in the UK will be based on customers receiving a “request to pay” and “pushing” the payment out via mobile banking app

Source: Zapp, Celent

• Zapp launched by VocaLink, the UK national payments infrastructure provider

• Supports all payment scenarios and different communication technologies (e.g. NFC, QR, one-time code)

• Commercial model based on a series of bilateral contracts rather than multilateral interchange

How Zapp works

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In the US, mobile payments at retail POS are being contested mainly among four types of solutions

Mobile

Payments at

the POS

(US)

“NFC camp” PayPal

Other cloud-based wallets Merchant Solutions

• PayPal card

• “Empty Hands”

• No direct

interaction, “in-

aisle purchase”

• Deal with

Discover

• Beacon,

check-in

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Arguably, Starbucks has been the most successful mobile payments solution so far

Starbucks mobile app

• Launched in 2011

• 10 MM active users

Good for consumers

• Rewards loyalty with lower prices and free drinks

• Conveniently on smartphone

Good for Starbucks

• Reinforces loyalty

• Lowers payment costs

• Enhances the brand

Evolutionary

• Existing loyalty program

• No new POS equipment

• Existing prepaid card base

Constant enhancement

• Supermarket rewards

• Early PassBook adopter

• Early Square adopter

Can other retailers replicate Starbucks success?

Can Retailer Apps Ignite Mobile Payments

at the POS? Section 2

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Issuer 1 Issuer 2 Issuer n …

Cash

Merchant 1

Merchant 2

Merchant n

…

• All own

transactions,

including cash

• PII and SKU-

level data, today

through loyalty

cards, tomorrow

via mobile apps?

• All own-issued

card

transactions

• Includes PII

data, but usually

no SKU

• All transactions

under their

scheme, no PII

or SKU data

Customers

• All their own

transactions

across card

issuers, cash and

merchants

• Detailed

information,

including SKU via

receipts

Issuers Networks

Retailers

Rights to Access Customer Data

• All transactions

through the wallet

• Typically get PII

data by asking the

customer to register

• Can get SKU data

via merchant

agreements and

customer

permission

Open Wallets

Source: Celent

Access to customer transaction data provides important clues about the likely success of various mobile payment competitors

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Open Wallets Retailer Apps

Infrastructure dependent

• Use case reliant on widespread

acceptance

• Requires either NFC or broad merchant

relationships

Ads & Offers revenue model

• Encourages disloyalty

• Access to share-of-wallet and search data

• Extract rents via offer engines

Closed-loop control

• Proprietary to a single retailer

• Typically bar-code or QR-code based

Customer loyalty reinforcement

• Embedded loyalty program functionality

• Access to SKU data allows targeted

offers and manufacturer leverage

• “Blind” to Open Wallet offer engines

Retailer Apps versus Open Wallets in the mobile POS space

E.g. E.g.

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Removes PCI risk

and development

overheads

Recent technology facilitates Retailer Apps for mobile POS payments

Payment card

tokenization

Secure cloud

Apple KeyChain

Braintree

Calls up app when consumer enters store

App discovery

& management Apple Passbook

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• A mobile payments consortium

– Formed in Aug. 2012

– Appointed CEO in July 2013

– Exclusive

• Retailer-friendly rule set

– Explicitly includes steering

– Protects retailers' data

– Serves up offers at low, flat rate

– Form-factor agnostic

MCX challenges the Open Wallet model

Retail partners include:

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Walmart’s new app only lacks payments

Good for Walmart Good for customers

• Loyalty focused

• Proprietary

• eCommerce &

in-store

• Coupons

• Dynamic shopping lists

• Detailed budgeting

• Guide to items in-store

• Transitions between in-

store and eCommerce

Recent investments include

• Torbit – Browser-speed optimization

• Inkiru – Predictive intelligence, data analytics and

decision engine

• Grabble – mobile POS platform

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So, are we doomed to deal with a different app for every retailer? … probably not

• Only large chain retailers can afford the overheads associated with sophisticated

analytics.

• Even among big retailers there are wide skews in analytics sophistication.

• The bulk of a particular consumer’s discretionary spend is concentrated in a modest

number of categories and merchants

Implications for card issuers Section 3

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Retailer Apps a challenge for all issuers

Retailer Apps may emerge with steering targeted solely at AXP

Retailer Apps emerge only at multinational merchants and steering is prevalent

Retailer Apps irrelevant to issuer strategies

High Low

High

Low

Interchange levels (MC/V credit rates)

Relative retailer sophistication

• EU - 0.3% • Australia - 0.2-0.5%

• China - 0.3%

• US - 1.5-2.2% • Canada - 1.5-2.7%

• Brazil - 1.3-2.3% • Russia - 1.1-2.5% • Mexico - 1.1-2%

Will retailers also seek to optimise their payments costs through steering? App steering is most practical in North America

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Casual spend Recurring spend

Everyday spend

Discretionary spend

Cash strong-holds Check/

ACH strong-holds

Debit strong-holds Credit strong-holds

• Taxis

• Newsstands

• Loans

• Utilities

• Telecommunications

• Insurance

• Supermarkets

• Gas stations

• Drug stores

• QSR

• Transit

• Department stores

• Specialty retailers

• Discount stores

• Entertainment

Limited opportunities to steer payment behavior Opportunities for steering via apps

Steering strategies differ by segment

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Credit

Discount rate:

2% + $0.10

Debit1

Discount rate:

0.05% + $0.22

Load Ten $5 txs One $50 tx Ten $5 txs One $50 tx

Total fixed cost $1.00 $0.10 $2.20 $0.22

Total variable cost $1.00 $1.00 $0.03 $0.03

Total $2.00 $1.10 $2.23 $0.25

Effective cost 4.0% 2.2% 4.5% 0.5%

Comparison of many small transactions versus one large transaction

Everyday spend Aggregation already diminishes fees

1. Interchange only; doesn't include network fees & acquirer fees

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Discretionary spend Will PLCC make a comeback?

Private-Label Credit Cards are attractive when used in conjunction with Retailer Apps

Leverage with Retailer App

• “Blind” statement-based offer engines

• Already tied to loyalty program

• Often carried by the most loyal customers

• Ensures top-of-wallet within retailer

Traditional benefits

• Carry no interchange; permanently reduce payments cost

• Reinforces loyalty program

Although growing, PLCC continued to lose share in 2012

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General steering tactics Rewards programs are not immune

Transactor Revolver Total Steering methods

No rewards 8% 15% 22% Any loyalty offer beats nothing

Cash back 21% 7% 28% Transparent, easy to match/exceed benefit

Aspirational 35% 14% 50% Retailers have levers to influence some portion

of this population

Total 64% 36% 100%

Interchange funds card rewards programs, so steering offers can have higher value and still reduce cost

Card programs composition (Oliver Wyman Consumer Survey)

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Future developments?

App-to-app checkout

Verified reviews of

places

Connected

apps?

Payment experience? There isn’t one…

PayPal Beacon

Uber

Check-in vs

check out?

Picture source: Dave Birch, Consult Hyperon

Zilvinas Bareisis

Senior Analyst, Banking

55 Baker Street

London, W1U 8EW

United Kingdom

+44 (0)20 7333 8333

zbareisis@celent.com

www.celent.com

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