Title here. Mobile Payments. Is Canada Ready? SECTORS AND THEMES

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1 Mobile Payments SECTORS AND THEMES Is Canada Ready? Title here Insights from our Global survey on mobile payments. Additional information in Univers 45 Light 12pt on 16pt leading October, 2011 kpmg.com kpmg.ca Credits and authors in Univers 45 Light 12pt on 16pt leading

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3 Mobile Payments Is Canada Ready? 1 Foreword According to KPMG International s 2011 Mobile Payments Outlook, more than 80 percent of Canadian industry players feel certain that paying for items using a mobile device will be mainstream in Canada within the next four years. So with the questions of if and when fairly squared away, the real challenge now facing the Canadian industry and we use that term broadly is how. Across the country, we see traditional players such as banks, credit card companies, and payment processors realigning their strategies to leverage mobile payments and thereby gain new market share, defend their traditional payment revenue streams, and lower their overall costs. The advent of mobile payments enables a whole host of new players to enter the value chain; many of which are poised to take advantage of the opportunity. Looking around the world, dozens of different approaches to mobile payments are taking shape. In Kenya and India, mobile network operators (MNOs) have leapfrogged over the banks to bring a convenient and reliable payment system to the masses, many of whom are unbanked. In parts of Europe and Asia, banks are partnering with MNOs to deliver coordinated standards that provide all participants with a level playing field. In some cases, banks are setting up mobile telecommunication services and telecom providers are buying financial institutions in order to launch integrated solutions into the market. This paper is based on the Canadian data and findings from two recent KPMG International publications: 2011 Mobile Payments Outlook and Monetizing Mobile: How banks are preserving their place in the payment value chain. Industry leaders from KPMG in Canada reviewed the findings to compare whether differences existed in terms of the trends and challenges identified. This paper reflects the Canadian data and provides added insights on the mobile payments landscape here in Canada. In the middle of all of this are the retailers who, while recognizing the convenience factor for their customers, are just coming to grips with what mobile payments really mean in a tangible way. What opportunities exist for them, particularly as these may relate to data capture, and how will the payments infrastructure change? We trust this research adds to the ongoing conversation about mobile payments in Canada, and encourage you to contact the authors of this report or your local KPMG adviser to learn more about the impact of mobile payments for your organization. The marketplace for mobile payments in Canada is poised for rapid growth as cross-industry collaborations together with the adoption of this technology by consumers shape a new value chain and new methods of payment. Factors that are key to the success of mobile payments include convenience for customers, shared technology standards, and robust safeguards for the privacy and security of data. Yvon Audette National Leader, IT Advisory Management Consulting

4 2 Mobile Payments Is Canada Ready? Canada Keeps Pace Mobile payments are on the cusp of being real in Canada. Consumer demand will be a key driver, but few companies have a strategy in place for taking advantage of this opportunity. Context Ian Shelley, Partner, Management Consulting The creation of cross-industry partnerships is crucial to the development of a mobile payments network in Canada. Telecommunication and technology companies, service providers, banks, and retailers will all need to work together to develop standards which are open, transparent, and effective for everyone in the new value chain as these will be critical to enabling adoption and acceptance by retailers and customers. However, given the strength of Canada s existing payments system, Canadian consumers may be reluctant to move to a new system without the clear benefits of an easy-to-use, highly accessible, and more secure payment method than the current options. In our opinion, mobile payments must be convenient and easy to use for consumers to adopt them en masse. Moreover, security and privacy will be major barriers that companies need to address before customers will feel confident using mobile devices as a wallet. Interestingly, Canada s Task Force for the Payments System Review has taken a uniquely Canadian perspective on formalizing a system. In their preliminary report, they maintain an inclusive approach, calling for among other Identified priorities from the Canadian Task Force for the Payments System Review In its preliminary report, the Task Force for the Payments System Review has clearly laid out the priority issues for Canada, including: 1. Increasing the fairness in the payment system 2. Updating the regulatory frameworks to deal with new technologies and providing a consistent environment for participants 3. Improving security and privacy, particularly online and with digital payments 4. Supporting the transition to a digital economy by modernizing legacy systems, eliminating legacy payments, and promoting the use of digital payments. The thrust of the Task Force s work has been to ensure that Canada remains current as payments evolve globally. One approach to this includes a proposal for a governance framework which will allow the industry to innovate. The framework relies on consistency for all participants and the establishment of a self-governing industry body. Many of the new and emerging mobile payment players fall outside of the Canadian Payment Association s framework. This means they not only face less of a regulatory burden than banks, but are also typically more nimble and better able to respond to changes in the market. The Canadian government is proactively engaging the industry through the specially-formed Task Force for the Payments System Review. This entity has produced a number of discussion papers to date and will submit final recommendations to the Federal Minister of Finance at the end of Canadian consumers enjoy one of the safest and most mature payment environments in the world. But while more than three-quarters of transactions made in Canada are conducted using a card either a Debit (Interac) or Credit Card cash continues to be used for most low value transactions like buying coffee or purchasing transit fares. These types of cash transactions are ripe for replacement by mobile payments and offer the greatest value to consumers via the convenience factor. The landscape is changing, at an ever increasing pace. The diagram at the top of the following page illustrates current developments in the Canadian marketplace.

5 Mobile Payments Is Canada Ready? 3 Current Future VISA runs mobile payment trail with Rogers and RBC Western Union launches international mobile payments Interac flash trials of NFC Debit Rogers announces its intent to acquire a banking license Fully enabled NFC handsets hit market Zoompass founded and operated by EnStream ZAPA launched at Insomnia Taskforce preliminary findings released Taskforce Full report released Presto project conceived Canadian Taskforce on payments announced RIM and Apple announce NFC capable handsets Full launch of Interac Flash NFC credit card rollout in Canada Initial launch of Presto BMO introduces a new mobile payment payment product New payments legislation/regulation with focus on mobile things a unified regulatory system that encompasses all players and equal access to payment facilities. The Task Force s preliminary findings seem to be very positive for the Canadian payments industry as a whole, however, the devil will likely be in the details when it comes down to cooperation and implementation. The next few months will be critical as smart devices supporting mobile payments make their way into the Canadian market. Canadians focus on privacy concerns and brand reputations In many ways, Canadian respondents to the global survey 1 cite the same concerns and opportunities as their global peers. Both seem convinced that mobile payments will be important to their businesses (74 percent of Canadians and 72 percent of global respondents), that they will be mainstream within the next four years (81 and 83 percent, respectively), and that consumers will very likely be concerned about the security of conducting transactions using a mobile device (71 and 72 percent, respectively) Mobile Payments Outlook, KPMG International, July 2011

6 4 Mobile Payments Is Canada Ready? However, Canadian responses also varied in a number of significant ways. For one, they were 11 percent more likely to suggest that citizens would be very concerned about privacy issues. In particular, the threats that customers data might be passed on to third parties or that hackers might be able to access their personally identifiable information were cited much more frequently than the global average (Figure 1). In fact, even Canadian companies with no current or planned mobile payments system were twice as likely to cite privacy concerns as the main barrier to adoption of mobile payments than their global counterparts. Interestingly, when asked what would help alleviate customers privacy and security concerns, 7 in 10 Canadian respondents cited the strength of the service provider s reputation, versus just 57 percent in the rest of the world (Figure 2). This may be attributable in part to the strong reputation enjoyed by Canada s banks, telecom companies, payment service providers and even international online specialty payment processors like PayPal and Google Checkout. 85% 80% 75% 70% 65% 60% 80% 70% 60% 50% 40% 30% 20% 10% 0% Figure 1. What are your company's most important privacy concerns relating to mobile payments? 73% 81% The threat of unauthorized parties accessing personally identifiable information Figure 2. What in your opinion would do most to alleviate customers mobile payments privacy and security concerns? 57% 68% 70% 78% The threat that financial and other information might be passed on to third parties All Regions Canada All Regions Canada Brand/reputation of the service provider 2011 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms

7 Mobile Payments Is Canada Ready? 5 Financial Services Canadian banks recognize that they are entering a brave new world. Customers are clearly adopting new technologies and uptake on mobile banking systems has been positive, making mobile payments the next logical step. Mobile commerce is an emerging channel and the competitive landscape is developing significantly. One of the biggest challenges banks face will be the inevitable transformation on the supply side of payments: managing authentications, processing credentials and facilitating their distribution, as well as providing customer support among other things. Banks will need to develop appropriate governance around the issuing, managing, and cancelling of digital credentials within a marketplace that is rapidly evolving. The changing value chain and opportunities for cross-industry partnerships is also a key consideration for Canadian banks as they choose from a number of potential paths to mobile payment deployment. And while the major credit card companies have gained traction with contactless Near-Field Communication (NFC) enabled cards over the past few years, remote debit payments may not be far behind. Given the rapid pace of change in mobile payment technologies, contactless debit and credit cards have a limited life cycle and represent bridge technologies on the path to a full mobile payments system. Consumer Context Issuer bank Card manufacturer Credential developer Postal distributor Trusted Service Manager Digital distributor Postal network Mobile network Secure activation All of the large Canadian banks are actively developing a mobile payments service. Some have already conducted joint ventures and pilots while others are still in the planning phase. But the window for first-to-market advantage will likely only last 6 to 12 months. Maximizing adoption and enhancing the systems value will require interoperability between institutions. Banks will need to make sure their credentials are available on any device and on any network to make sure they are widely accepted. Most Canadian banks are looking closely at ways to integrate loyalty programs associated with payments into their mobile offerings to make the system more user-friendly and gain additional customer data and usage patterns. The reality is mobile commerce isn t only about the payments. Mobile payments will require significant change to the payment supply chain in order to adapt to new authentication requirements, digital credentials, and electronic distribution, but few service providers currently exist in the Canadian market to service these needs. Just who will function as the Trusted Service Manager (TSM) the central credential manager - is yet to be determined. The role of banks, payment processors, merchant acquirers, credential providers, and others in the new value chain will be greatly altered over the next few years. Careful decisions will be required as to which technology to adapt and how to go to market. Adding complexity to these decisions are questions around who will be responsible for managing credentials, what happens when transactions fail, or when fraud occurs, and whether customers will interact with banks or MNOs. Yet while mobile payments represent unchartered territory, new exciting opportunities to gain market share, new customer data, and to enhance customer loyalty clearly exist. Mary Filippelli, National Industry Leader, Financial Services

8 6 Mobile Payments Is Canada Ready? Financial Services lead the way Clearly, mobile payments will have the biggest impact on the Financial Services industry. According to our survey, responses from business leaders in the Financial Services sector indicated that mobile payments are already a main activity or key enabler of their business and more than a third of these (38 percent) report that they already have a strategy and current service in the market (Figure 3). 40% 30% 20% Figure 3*. Does your company currently offer a mobile payments service or have a mobile payments strategy? And while it should come as no surprise that financial services companies are the most bullish about the prospects for m-banking (a technology that maintains the bank s dominance in the payment value chain), it is telling that they see the specialist online systems (such as PayPal and Google Checkout) as having an equal opportunity at success (Figure 4). 10% 0% It has a strategy and a current service It has a strategy but as yet no service It has no service and no plans for one in the foreseeable future Given the introduction of contactless cards (MasterCard s PayPass and Visa s PayWave are two examples) and the likely emergence of NFC-enabled mobile wallet solutions by the payment associations, it is surprising that these ranked low on the financial services agenda. However, financial services companies seem to remain confident in their dominance of the payment ecosystem. When asked what category of players would have the most important role in mobile payments, financial services respondents tended to cite Credit Card Companies (their traditional payments partners) and Telcos as holding the same weight (Figure 5). Retailers were positioned as somewhat low in the value chain, which may cause problems for the financial services industry when it comes time to roll out their new service. Merchant buy-in is fundamental to implementing new payment solutions, however, financial institutions tend to leave that up to the payment associations which already have retailer relations for acceptance at Point of Sale (POS). 70% 60% 50% 40% 30% 20% 10% 0% Figure 4*. Which mobile payment method is already mainstream or most likely to get traction in your marketplace? Online M-Banking Cards M-Wallet Carrier Figure 5*. Which industry or enterprises will play a significant role in mobile payments? (Average ranking for each answer using a scale of one to ten) Banks Credit Card Companies Telcos Specialist Technology Retailers Online Companies Providers Others * Figures 3, 4, and 5 represent data from respondents in the Financial Services sector only KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms

9 Mobile Payments Is Canada Ready? 7 Technology, Media & Telecommunications The introduction of mobile payments thrusts Canada s telecom providers into the middle of the payment value chain, providing unique opportunities to develop new revenue streams and services. It may also offer telecommunication companies an opportunity to expand into credentials distribution and security offerings to complement banks mobile payment solutions. Technology companies will also find mobile payments to be a rich source of new opportunities, particularly in the provision of services that enable the mobile payment ecosystem. Companies such as Apple and Canada s Research in Motion (RIM) may have a strong opportunity to capitalize on this. RIM s most recent mobile product is NFC enabled, it has an existing application network (small but growing) and possesses a strong reputation for maintaining data security all strong indications of future opportunities in this area. Similarly, Apple is well positioned to take advantage of this market given its growing database of credit card users, the existing number of mobile applications, and strong consumer demand for its smart devices. For software developers, there is significant potential as well both in terms of developing applications but also around data collection and management from inventories to consumer buying preferences. Demand for the data management software as well as enhanced privacy and security features is likely to grow. Context Canada s MNOs primarily Rogers, Bell, and Telus will have critical roles in the evolution of mobile payments in Canada. Following the trend of large retailers, Rogers recently applied for a bank license. It is likely that Bell and Telus will eventually do the same or adopt a strategy of cross-industry collaboration. Mobile payments open up a new market for Canadian technology companies that are able to provide secure and user-friendly services such as software development, handset applications, and even white label mobile payment solutions. Online technology leaders such as Apple and Google are poised to capture a large segment of the Canadian mobile payments market. Both companies have been extending their reach into this area. The next generation of iphones are widely expected to contain payment-enabling NFC chips. Not to be outdone, Google which already has NFC enabled devices in the market, recently proposed a purchase of handset maker Motorola and is piloting the Google Mobile Wallet. Innovation lies at the heart of this new shift in how we pay. For communications companies and software developers, opportunities abound but success will be based on their ability to commercialize and bring robust services quickly to market. An integrated collaborative approach across industries seems like the shortest road to becoming an integral player in the evolving value chain. Brendan Maher National Industry Leader Technology, Media & Telecommunications

10 8 Mobile Payments Is Canada Ready? Finding a place in the mobile value chain Both the Telecom and Technology sectors were somewhat more bullish on the pace of change than other sectors, with 86 percent of technology respondents and 88 percent of telecom respondents asserting widespread adoption in the next four years, as compared to 83 percent on average. Interestingly, while all other sectors cited security as the biggest challenge facing the development of mobile payments, the telecom sector seemed more concerned about technology and adoption challenges (Figure 6). For technology companies and to a slightly lesser degree the telecom sector as well mobile payment solutions offered by specialist online systems (such as PayPal and Google Wallet) stand to gain much higher traction than all other mobile payment technologies (Figure 7). 80% 70% 60% 50% 40% 30% 20% 10% 0% Technology/ Adoption Security Figure 6*. What in your opinion are the main challenges companies face as they develop mobile payment strategies? Privacy Regulation/ Legislation Reliability Complexity Availability Cost Other Aggregate Telecom * Figures 6 and 7 represent data from telecommunication and technology companies only Figure 7*. Which mobile payment method is "already mainstream" or most likely to get traction in your marketplace? Online M-Banking Cards Carrier M-Wallet Technology Telecom

11 Mobile Payments Is Canada Ready? 9 Retail The introduction of mobile payments bears a number of unknowns for Canadian retailers. Cost is a likely the most significant of these, not only the upfront capital requirements of the POS network, but also those for potential systems integration that may be required to adjust to mobile payments. Some developments such as potential two-way tie ups between telecom companies and card brands could effectively drive up the transaction costs for retailers and result in multiple payment system infrastructures that will be costly to implement and maintain. The government plays a big role and Canadian retailers will be anxious to see how the Voluntary Code of Conduct created to govern payment card networks might apply to the new mobile payments market. The initial implementation of mobile NFC payments will require the customer to enter a PIN into their phone and wave the phone over a POS reader much as they now do with contactless cards. However, programming changes will be required to the POS when proprietary payment methods are considered or when loyalty programs are added. Ultimately, as it stands today, once a merchant is set up to accept contactless card payments, they can by default accept mobile NFC payments. Overwhelmingly, Canadian retailers have started to realize that the mobile payments agenda is highly susceptible to being defined by the payment card associations, financial institutions, and MNOs. Mobile commerce is an emerging channel and radically disruptive similar to what the internet was 22 years ago. Retailers need to quickly get ahead of the curve, understand what the card brands and telecom providers are planning, and work with the Retail Council of Canada to ensure that retail and consumer voices are part of the debate. Context While Canadian retailers tend to welcome any advances that make the purchasing process easier for consumers, they have a number of very valid concerns about the development of mobile payments in Canada. Willy Kruh Global Chairman Consumer Markets Many Canadian retailers are already undergoing Point of Sales upgrades to accept both Chip and PIN technologies and NFC-enabled chip cards. Any further changes to the POS in the near term may be met with some resistance from retailers. For the time being, the most palatable solutions for merchants are likely the ones that allow them to leverage their recent investments in technology. While retailers appear to be standing on the sidelines, many are looking closely at mobile payments to understand the value, both to them and to their customers. They are also realizing that their mobile strategy is also about brand protection and having their products and services readily accessible to their customers. The acceptance and participation in the roll out of mobile payments by retailers will be critical to adoption. Retailers and consumers are currently afforded a level of protection under the Voluntary Code of Conduct that governs the credit and debit card industries of Canada. The mobile payment solutions currently being developed by the payment associations leverage what has already been established for contactless cards, including the communication protocols between POS readers and payment form factors, as well as encryption, key management, etc.

12 10 Mobile Payments Is Canada Ready? Searching for value Globally, retail companies seem to echo Canadian sentiment. More than 30 percent of retailers in the global survey have no current plans for mobile payments, indicating a wait and see attitude towards evolving technology and value chain developments. Not surprisingly, retailers also expect the introduction of mobile payments to have less of a near-term impact on their business than their counterparts in other industries such as Financial Services or Telecommunications. For those retailers with no mobile payment plan, half claimed that mobile payments were not part of their corporate business strategy, 43 percent cited technology limitations and only slightly fewer pointed to concerns over security, privacy and cost (Figure 8). Retailers, who arguably are at the front line of the payment value chain, tend to see specialist online systems such as PayPal and Google as the technologies that hold the greatest prospects for success (Figure 9), likely reflecting their experiences with these players over the past decade. And while the prospects for carrier billing were understandably low within this segment (carrier billing is most popular in the buying and selling of virtual goods such as ring tones), retailers also seemed pessimistic about the prospects for mobile wallets, which will likely be the enabling technology behind NFC adoption. * Figures 8 and 9 represent data from participants in retail companies only. 60% 50% 40% 30% 20% 10% 0% Figure 8*. What are the main reason(s) why your company does not have a mobile payment service? Not part of the corporate business strategy Technology limitations Concerns over security/ privacy Cost Overall user experiences Other Not attractive or viable business model Figure 9*. Which mobile payment method is "already mainstream" or most likely to get traction in your marketplace? Online M-Banking Cards M-Wallet Carrier

13 Mobile Payments Is Canada Ready? 11 Developing a Path to Mobile Payments The path to mobile payments is anything but clear and a number of key areas will undoubtedly add to the complexity for Canadian participants as the market unfolds. For those that are able to address these considerations early, significant opportunity exists to gain competitive advantage and first-mover status in the market. Figure 10 Survey respondents came from a variety of geographies and industries It is worth noting that Canadian companies share many of the same concerns, risks and opportunities as their peers around the world. Issues related to security, privacy, ease of use, merchant acceptance and customer adoption are all examined in detail in our global reports, which serve as a strong benchmark for Canadian participants Government and Regulation The formation of Canada s mobile payments marketplace will undoubtedly require a number of players to change their compliance regime to meet more rigorous regulatory requirements, particularly if new entrants are required to comply with the Canadian Payment Association s rules and standards. The growth of a mobile payments ecosystem will also require supportive government regulation which may provide significant benefits to service developers. Technology With handsets, standards, and infrastructure still maturing, selecting the right technology will continue to be a challenge for Canadian business leaders for the near future. However, pilot projects and partnerships will help organizational IT departments to prepare for the eventual introduction and integration of new systems and at the same time gain some much needed experience with what will soon be an important customer channel. Strategy KPMG International s global survey shows that around the world there are innovators and followers; those that hope to gain first-mover advantage and those that would rather protect their investment (and potentially reputation) until one technology emerges from the pack. Both are viable strategies, but each requires a clear and integrated plan to ensure that risks are managed and opportunities seized. Tax Considerations The development of new technologies as well as the complexities of interoperability among card issuers, processors and the payment network, will require a thorough assessment of government subsidies such as SR&ED, training, and digital media tax credits. Cross-industry partnerships will also need careful structuring to control the risk of multiple permanent establishments and to establish effective transfer pricing. At the same time, opportunities from the use of cloud infrastructure will nevertheless permit advantageous taxation planning, while responsibility for proper administration of transactional taxes covering multiple jurisdictions will be an important component of contract negotiation among joint ventures. ASPAC (47%) Americas (71%) EMEA (59%) Base: 519 global companies that specified a region (Multiple responses allowed) Retail (10%) Telecom (19%) Financial Services (21%) Technology (27%) Other (23%) 19 Companies have much to consider, from identification of the right partnerships and technologies through to evaluations of risk, impact on channel costs, customer support models, technology systems, and, of course, their brand promise. Mobile payments though are just one element of the evolution to full m-commerce. Base: 970 global companies

14 12 Mobile Payments Is Canada Ready? Methodology In order to assess the attitude and maturity of Canadian companies and their global peers with respect to mobile payments, KPMG in Canada, in cooperation with KPMG International, conducted a global online survey of almost 1,000 companies between the period of September 2010 and February The survey focused on four key areas: mobile payments business impact; the adoption of mobile payments technologies, applications and services; opportunities and barriers driving mobile payment strategies; and key players in the mobile payment ecosystem. Note that not all respondents answered every survey question. Total values include responses from those who did not provide some of the demographic information, for example region, therefore total percentages may appear inconsistent with the individual regional percentages.

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16 Contacts Brendan Maher Partner, Audit National Industry Leader Technology, Media & Telecommunications T: E: bmaher@kpmg.ca Paul Simonetta Partner, Audit National Sector Lead Telecommunications & Media T: E: psimonetta@kpmg.ca Willy Kruh Partner, Audit Global Industry Leader Consumer Markets T: E: wkruh@kpmg.ca Mary Filippelli Partner, Advisory National Industry Leader Financial Services T: E: mfilippelli@kpmg.ca Yvon Audette Partner, National IT Advisory Lead Management Consulting T: E: yaudette@kpmg.ca Ian Shelley Partner, Advisory Management Consulting T: E: ishelley@kpmg.ca kpmg.ca/mobilepayments The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.