The Great Payments Transformation: Insights from SIBOS 2012

Transcription

1 The Great Payments Transformation: Insights from SIBOS 2012 February 2013 kpmg.com/cn

2 Contents Foreward The impact on Hong Kong of the Great Payments Transformation The impact on Mainland China of the Great Payments Transformation 04 The impact on institutions from the Great Payments Transformation The impact on Merchants of the 05Great Payments Transformation The impact of the Great Payments 06Transformation a debate

3 Foreward SIBOS, the payments conference organised by SWIFT took place in Osaka between 29 October and 1 November Attended by over 6,000 members of the payments community, it is the largest and most noteworthy event in the calendar for the payments industry. KPMG attended the event and brought a number of insights back with them which were published in our thought leadership The Great Payments Transformation: Insight into the payments ecosystem. As part of our continued thought leadership, we delivered a series of roadshows with our partners from SWIFT in Hong Kong and China in order to share our insights and the knowledge we had gained. This report is a compilation of the presentations and discussions which took place during the roadshow and provides a summary of the key messages which were provided by all of the presenters.

4 The impact on Hong Kong of the Great Payments Transformation James McKeogh Director, KPMG James McKeogh discussed three important questions, which were highlighted during the SIBOS event and provided some insights into what is taking place in the market. Is payments innovation really moving east? The answer is yes. Jurisdictions like the U.S. and Europe have already started their payments transformation with the ever increasing trend to implement new services such as faster payments. In Asia, the roll out of this functionality and ability to perform real-time high value payments is only just coming into maturity. However, the maturity of the market in Asia also means that it is a fantastic environment in which to try new payment solutions and to make the most of the technology boom which is taking place. While the regulatory environment across Asia as a whole may not be as mature as the U.S. or Europe with discreet regulatory requirements in different countries, the appetite from consumers and willingness to adopt new ways of paying is a compelling driver for would-be market entrants. Add to this the consumer market growth surge that is being seen and the volume play which the likes of China can perform, and it becomes increasingly clear why Asia will be the innovation source for the payments industry. Is the HKMA really helping the Hong Kong Payments environment? The HKMA is very interested in assisting players in the payments ecosystem to develop and improve the way that payment services are provided. The regulator has already instigated studies into the development of a Near Field Communications (NFC) ecosystem, which will provide the back bone for mobile payments. In addition, the HKMA has been providing support for improved RTGS (Real Time Gross Settlements) clearing schedules, improved RMB cross-border clearing and guidance for consumer retail payments. This level of of involvement from the HKMA is a compelling sign for the industry and will help to deliver a sustainable and controlled market in the future. When will we see change in the Hong Kong ecosystem? The change in payments in Hong Kong is not something that we are looking towards; rather, it is actually something that has already commenced. Within Hong Kong, we are increasingly seeing innovators entering into the market and providing new payment methods and ways of interacting with technology. What we will see over the next year is that the payment transformation pace will increase, the new players in the ecosystem will gain a foothold as collaboration between telecommunications providers and financial institutions increases, and that the ultimate benefactor of these changes will be the consumer.

5 The impact on Mainland China of the Great Payments Transformation Mary Chong Partner, KPMG Mary Chong, who is based in Shanghai and is the Head of the payments practice for China, also focused on three of the top questions facing payment companies in China. How do Chinese companies collaborate in the international environment? The question can be looked at from two perspectives; where the international market includes China and is looking out and where everyone is looking at China for opportunities. For Chinese companies that have an international strategy, a domestic market of 1.2 billion individuals places them in a strong position for expansion. According to the Asia economic report, the growth in China s economy continues due to the large consumer base and market demand it has domestically. One of the most successful payment companies in China, AliPay, is ambitious and sees itself as an international company, adopting international strategies and perspectives and aiming at the international market beyond China s border. This is in line with many of its peers including TenPay. For international firms looking to grasp the opportunities in China, this is predominantly through collaboration with the existing players in China s ecosystem or through partnership with the new third party payment providers. What impact are the new players in the ecosystem having in China? The increasing number of third party payment providers in China is a sure sign of how things will develop. Being more nimble and adaptable to market trends means these payment organisations can react quickly to the changing consumer market. While the smaller third party payment players may not have huge market shares, they can be profitable, if they have a clear business value proposition, due to the massive size of the China market. In the future, we are likely to see consolidation and acquisition in this market with larger organisations being created or existing dominant players solidifying their position. Telecommunication providers will also continue to impact on the payments ecosystem, but the interesting point will be whether they do this alone or through collaboration only time will tell. Is China truly innovating payments? The payments market in China is truly innovating how payments are provided in the region and also how payments will occur globally. RMB Internationalisation is one of the most significant changes which is taking place and has the potential to fully revamp the way settlements are performed around the region. In addition social media s role in payments cannot be over emphasised, especially in relation to mobile transactions. The fasting moving pace of developers and the ever increasing integration of social media platforms with payments platforms are distinguishing China as a leader and not a follower. KPMG s recent luxury report highlights that e-commerce in China is not the same as the rest of the world and it will continue to develop. As the nation is brought online, China will lead the way in developing efficient and innovative e-commerce solutions. The Great Payments Transformation: Insights from SIBOS

6 The impact on institutions from the Great Payments Transformation Lisa O Connor Initiative Director for RMB Internationalisation, SWIFT SWIFT, as the organisers of the annual SIBOS event and through their relationships with many financial institutions, play a unique role in the market and also have deep insights into the Great Payments Transformation. Lisa O Connor was on stage to provide her thoughts. The cost of compliance One of the biggest issues for funding the payments transformation within institutions is that on average, around 70 percent of budgets are spent on meeting regulatory obligations, leaving only 30 percent available for enhancements and improvements. The cost of compliance for the large financial institutions is a real burden and in many cases, is preventing them from innovating. The teachings of Kanō Jigorō This situation is allowing the less regulated and more nimble third party payment providers to continue to expand their services and be involved in the changes occurring in the ecosystem. One of the key messages from SIBOS 2012, and since it was based in Japan, was consideration for the teachings of Kanō Jigorō, the founder of Judo. Kanō taught that there are four principles to Judo and these are very relevant to the payments industry today and where we are seeing the market develop. Maximise efficiency with minimum effort Judo is about using the mass of your opponent to your advantage and making sure that you minimise the effort expended in order to achieve success. Within the payments ecosystem, we are seeing third party payment providers take advantage of the relationships with merchants and consumers, where value add can return the most revenue and leave the costly settlement activities to the large financial institutions. Train safely Another key aspect of Judo is to ensure safety when training and trying new techniques. Within payments, it is the smaller players who can try new ways of delivering payments solutions since they have less to risk from an existing brand and market share perspective. Larger financial institutions must consider their existing business activities when looking at their delivery models, which is potentially why we have seen a slow migration to the mobile platform. Sudden death Similarly, sudden death is having the courage to drive forward and risk everything on the adoption of a new payments solutions, something the entrepreneurial third party payments providers can do much easier than the larger financial institutions. This can be witnessed through the roll-out of innovative payments solutions using many different technology capabilities, from NFC to QR codes, with providers all hoping that their solution will be the one which becomes the preferred model of transacting. Learn from competing The final principle is that in order to succeed, financial institutions need to be in the market from day one, competing with the new and more traditional players. By standing on the side lines, it will allow early providers to become the standard through inherent adoption. We are seeing this in action within Hong Kong where the large retail banks such as HSBC and Hang Seng are rolling out their mobile payment solutions to the market. Growth in 2013 Coming to a close, SWIFT also believes that the banking industry will continue to develop the delivery models in 2013 and more and more will move from the current Transaction Banking model to an advanced Experience Banking solution with the key point of putting the customer at the centre of everything that is delivered. To achieve this, SWIFT expect the banks to be developing the efficiency of how they deliver their services, from using business intelligence to provide competitive advantage to creating centralised payment hub environments. In addition, we are likely to see improvements in the customer experience with more focus on peer to peer based services and establishing market institutions so that the small and the big guys can play together to benefit the customer. 4 The Great Payments Transformation: Insights from SIBOS 2012

7 The impact on Merchants of the Great Payments Transformation Thomas DeLuca Managing Director, Advanced Merchant Payments Tom DeLuca provided a perspective, which comes direct from dealing at the coal face of payments. As the Managing Director of Advanced Merchant Payments (AMP), a financial services technology company based in Hong Kong, he deals with merchants on a daily basis, understanding the problems that they face and assisting with liquidity support through the card payments they take. The more things change, the more payments strategy matters Since 2009, AMP and KPMG have been working together on a variety of thought leadership activities from the initial study of card payments in Asia through to a more specific discussion on the merchant s role in the payments ecosystem. One thing which is clear is that the key strategic considerations relative to payments acceptance strategies have not changed, if anything, that the findings in these reports are as relevant now as they were when initially identified by KPMG. So how is it that with all the changes we are witnessing in the ecosystem, the same key strategic considerations remain? A big factor is the large number of moving parts in the ecosystem and that no one has come up with a suitable silver bullet solution. From mobile payments to the expansion of alternative payment schemes, we still see payment strategies based on incorrect assumptions such as the lowest cost provider (i.e. cheapest transactional discount rate ) always gives the best overall value. Merchants today need to start thinking more broadly and considering liquidity requirements, global acquiring capability, speed of access to management information and how they can monetise the huge amount of transaction data to which they have access. the many payment networks out there for example, you cannot do business efficiently with the Chinese retail consumers without supporting Unionpay. Obtaining the balance between all these factors in order to achieve the most efficient and effective payments strategy can actually involve managing a number of moving parts. So what is the market doing about it? Payments is increasingly being seen as a huge source of revenue improvements for many organisations. In fact, Jack Dorsey, creator of Twitter and the founder and CEO of Square, a mobile payments company, coined the phrase the New Oil for the potential impact that the data garnered by the payments industry could have up on how all business is actually performed. For merchants, their strategies and business hopes are focused on bringing value to the customer - a point which resonates with what the banks are doing in their evolution of the banking model previously discussed by SWIFT. What about China? China s merchant community and the payments ecosystem as a whole are going through a revolution. The financial backing which exists for many of the players and the public support of the government for payments and their desire to innovate provides a stable platform for growth. In addition, the aggressive ambitions of key players such as Unionpay, Tencent and Alibaba is accelerating, the speed at which the China merchant market is developing. These changes are not only of significance to domestic players in the China market, but also the entrepreneurial ecommerce entrants which eye the China market with interest. For these players, they must keep monitoring the development of RMB payments and related logistics since these will be key to their business success. Is it really that complicated? Many merchants still see the act of taking a payment as a simple activity without comprehending some of the core strategic nuances. From needing to support multiple different channels of accepting payments; either in person, over the phone, via mobile payments or traditional card; in different currencies; with different treasury management and tax implications; through to supporting

8 Impact of the Great Payments Transformation a debate 6 The Great Payments Transformation: Insights from SIBOS 2012

9 Anson Bailey, our panel moderator, opened the discussion by asking Edge Zarrella, Client and Innovations Partner at KPMG, for his opening remarks on the presentations he had heard and what he believed were some of the key development areas. It s all about the consumer The Asian consumer is having a significant impact on the payments environment. KPMG s report, The Rise of the Digital Multitasker considers what the Asian consumer is doing and the impact they are having. Beijing is becoming more sophisticated than New York consumers in China are now buying across five to six different devices - from mobiles, to tablets, to computers and televisions. Edge went on to give examples of where Chinese consumers are using the latest technology to innovate, how they pay not only for their normal electronic transactions such as itunes, but are also leading the way with purchasing property and luxury goods using the mobile platform. But how do we make money? Edge brought the discussion to one of the most important aspects: how we actually make money from the new payment technologies, which are being made available. The consumer is firmly interested in attaining greater convenience on these platforms. The Great Payments Transformation: Insights from SIBOS

10 RMB Internationalisation Edge moved away from the consumer aspects of payments to institutional trading requirements. During SIBOS, while on a panel discussion, a senior member of a Japanese bank clearly stated that International trade in Asia should be based on RMB.. This move is seen as a key factor to building an Asia centric cross border payments mechanism. Anson then brought Lisa O Connor into the discussion in order to further investigate RMB Internationalisation and SWIFT s recent press release stating that Chinese RMB payments fail to take off in the United States. Lisa explained how since 2010, SWIFT has begun mining the transaction information which they have stating that Big data is a big responsibility, but we need to be able to share it with the industry. From initial analysis, SWIFT has identified that RMB is the fastest growing currency on the network, with 14.8 percent compound growth. She highlighted that the next closest was the Indian Rupee with approximately half the growth rate. However, this significant growth in RMB processing is not impacting the U.S. market. Lisa explained that Many U.S. SAP systems only speak in U.S. dollars and many corporate treasurers in the U.S. do not understand the fundamental shift that is happening. Lisa is hopeful that in the coming months, we will see increased U.S. transactions with China being redominanted into RMB, but that unlike Europe, these will be non-trade related to begin with. China Innovation Anson subsequently asked Mary about the innovation she is seeing in China around payments. For Mary, she sees that the biggest innovation in China is focused on business models with an expectation that technology change is a given. I want to outsource, I want to work with all these parties who have the creative ideas and go to market. Mary followed up that there are 198 approved and licensed third party payment providers who are looking to develop the market,...but there a hundreds who are yet to achieve this. Mary indicated that there are concerns over security and privacy, but this is not stopping the exponential growth which is being seen in the market.

11 Securities impacts Anson opened the questions to the floor with the audience looking to understand how the payments industry can impact the securities industry. Lisa initially responded how payments improvements can provide faster account funding and increased convenience through development of online portals to provide services. Mary also highlighted how in China, the development of online and mobile based capabilities are significantly improving the user experience and that combined capabilities from securities providers for trading and payments processing is not unusual. James then discussed some of the technology changes taking place in the securities industry, especially how efficiency and effectiveness improvements by utilising Cloud-based solutions to provide forward facing solutions whilst also balancing that with keeping core intellectual property internal within core systems. This approach is being adopted by the more nimble boutique securities brokerages, but the mainstream providers are tied to internal solutions with a lack of flexibility or gaining efficiencies from virtualisation or hubbing capabilities. What are the regulators doing The audience was also interested to understand what the regulators are doing in this space. Edge opened by explaining how the regulators are having trouble and struggling to understand how they can regulate the payments transformation. According to Edge, They are dealing with a financial crisis and that aspects around taxation and liquidity on payments is a difficult area to determine. With a new payments company being introduced on almost a weekly basis there are some real problems for the regulators to deal with. Anson brought Tom DeLuca into the conversation who gave the view of the merchant and more importantly of the consumer. It is one that gets votes, said Tom. Merchants and consumers directly see the costs associated with performing payments and desire regulators to do something about it. Tom added: Trouble is, the regulators are behind. The entrepreneurs in the industry are driving forward and regulations are not able to keep up. Tom also highlighted how the Chinese government through licensing is implementing control on the third party payments industry and he applauded their efforts considering the global approach has been to wait until consolidation occurs by natural market forces. However, he also expressed caution that such regulatory efforts might hinder the development of the payment sector by impeding the entrepreneurs which have historically driven the advancement of the sector. Edge brought up how the ecosystem also continues to expand and how regulation continues to be on the same group of people. However, the expansion needs to also consider all of the different components when it comes to managing the risk of the payments environment.

12 Singapore as a case study Both the audience and the panellists raised a number of points around Singapore s approach to improving their payments ecosystem. The key component of the Singapore way is the high degree of the Singapore government involvement. Edge stated how the Singapore government is always looking forward and how new technology, such as mobile, can support their citizens over the next years. Tom re-emphasised that the Singapore government is looking to provide a positive influence on the improvements. Tom believes that the NETS (National Electronic Transaction System) is a good example of how the government is pushing the banks and protecting the banks since risk of introduction to the market is shared. The audience highlighted how Singapore has the benefit of delivering Payments Transformation as an image project rather than a commercial project, something which can make a difference to success or failure. Lisa highlighted that this industry based approach can help to manage the risk while still delivering based upon a commercial model. Look to the future The trend of Asia is that people don t buy in the same way that they used to, Edge opened with. From movies to books there is a big change in how the new consumers are going to be buying. HMV has gone bankrupt, a major media brand from the UK. A key component on this demise has been the changes in buying styles from the new consumers. Anson highlighted that KPMG s Global Reach of China Luxury Survey has seen the likelihood to buy online shift from 20 percent to 44 percent. Mary discussed the ecommerce activity which is going on in China, but reassured that the offline stores will still have a presence. The Chinese consumer likes to touch and feel but where ecommerce plays is from integration with Social Media for sharing information on trends and fashions. Bricks and Clicks will be the strategy for China added Anson.

13 mcommerce the global enabler Following on from the discussions on ecommerce, the audience raised questions about the power of mcommerce and the differentiator which it can make. Edge stated that, mcommerce is not just about credit cards and explained that it is also an enabler for the individuals who cannot get access to regular lines of credit. Everyone [in China] can have access, for a price, to a smart device which is a significant enabler for the Chinese government to achieve its goal of bringing a nation online. As part of the monetisation of this capability, value from the transaction data and ability to analyse the transaction activity must play a key component in its delivery. Mary also highlighted that it is not just mobile enabling this market segment, but prepaid cards are also a significant facilitator. As Mary said, A lot of prepaid card players are not banks, which is opening up the market and offering consumers a choice. Key trends As part of the closing, Anson asked each of the panellists to look into their crystal ball and provide some insights into where they see the market going. Tom believes that people will start to focus on payments from more of a strategic value rather than just seeing it as a service cost. Mary followed up by reconfirming that while transformation has been taking place for a while, people are now looking to monetise and achieve value from the projects they are working on. Lisa is confident that RMB internationalisation will maintain its speed and that the Banks will have a key role to play. [The Banks] are the smartest and best; [they have the] most comprehensive view of regulations and the relationships to compete assuming that they are also willing to collaborate. James believes that payments is going to be a driver and facilitator for indirect revenue streams, answering how payments can be monetised through loyalty, discounts, management information and greater market information. Edge was then invited to provide his final comments, and from his perspective, we must stop looking to the west. There are new parts of the world opening up to the payments environment from Africa to Brazil to China. In addition, Edge reiterated that we need to look to our children and understand the spending patterns and ways that they buy since this is what will drive the payments environment of the future. Moderator: Anson Bailey Partner, KPMG Panellists: Edge Zarrella Client and Innovation Partner, KPMG Thomas DeLuca Managing Director, Advanced Merchant Payments Lisa O Connor Initiative Director for RMB Internationalisation, SWIFT Mary Chong Partner, KPMG James McKeogh Director, KPMG

14 Thought leadership KPMG member firms provide a wide range of studies, analyses and insights covering strategy, technology and business transformation issues. For more information, visit kpmg.com or kpmg.com/cn SIBOS Report (2012) Luxury Report (2013) KPMG Mobile Payments Outlook: The opportunity is rich Merchants Report (2011) Asia Card Payments Report (2009) The Changing Face of Commerce The Converged Lifestyle Mobilising Innovation - Technology Survey 12 The Great Payments Transformation: Insights from SIBOS 2012

15 Contact us Payments Team Egidio Zarrella Partner Clients and Innovation James Mckeogh Partner Payments Transformation Lead, Hong Kong Mary Chong Partner Payments Transformation Lead, China Jeremy Fearnley Partner Payments M&A Lead John Timpany Partner Payments Tax Lead Anson Bailey Partner The Great Payments Transformation: Insights from SIBOS

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