Banks and the Digital Wallet Conundrum whitepaper May 2014

Transcription

1 TM Banks and the Digital Wallet Conundrum whitepaper May 2014

2 TABLE OF CONTENTS Executive Summary 3 Customers and the Need 3 Market Place and the Players 4 Banks and the Digital Wallet Opportunity 6 Conclusion 7 authors 8 References 8 About HCL , HCL Technologies. Reproduction Prohibited. This document is protected under Copyright by the Author, all rights reserved. 3

3 Executive Summary As the payments industry evolves and accelerates, growth in mobile and electronic payments is generating a lot of interest. With an expectation of significant uptick in volume and value in the years to come, the market remains attractive for diverse entities in the payments eco-system. E-Commerce & m-commerce is an important constituent of electronic and mobile payments, and digital wallets leads in mindshare amongst market players. The progress made by leaders in online payments such as PayPal, and the low entry barrier has resulted in the proliferation of new launches. Most banks have remained in the background of all these developments and have not created the buzz, given their hold on the value chain. As the adoption of the digital wallet increases, it is the right time for banks and financial institutions to begin charting their journey or run the risk of being left behind. Customers and the Need Digital Wallets are increasingly becoming Money Managers, Shopping Advisors and not just Value Containers Proliferation of smart phones and high availability of the Internet has fuelled a drastic change in the behavior and the mindset of customers. Mobile payments are a natural extension of this behavior and consumer interest in mobile payments and particularly at the point of sale remains high. As smart phones turn in to digital wallets, it is vital that the device s ability to provide a wholesome experience is leveraged. Integrating POS payments with value added services such as Deals/ Offers, Special Merchant Promotions, Loyalty management, Shopping Advice/ Product comparisons, In-store navigation aids, are defining the future of mobile payments and digital wallets. However, its success depends on relevance and timing, and in being least intrusive. If digital wallets are to replace traditional wallets, it has to go beyond the shopping experience. Wallet usage and spending patterns are driven by multiple behavioral traits that a digital wallet can help codify. The innovators in the digital wallet space are driving and helping to build customer expectations. Despite the hype, consumer adoption is very low. This could be due to the lack of acceptance, usage difficulty, non-availability of a trusted source and feature limitations. However, PayPal and Starbucks have demonstrated that the market has a tremendous potential. 2014, HCL Technologies. Reproduction Prohibited. This document is protected under Copyright by the Author, all rights reserved. 5

4 Market Place and the Players Innovation, Adoption and Acceptance are critical for leading in a fragmented market The nature of the wallet technology has provided opportunities for diverse entities to participate in the market. The battle lines are clearly drawn merchants and service providers on one end of the spectrum, banks, financial institutions, and card associations at the other end. With organizations such as PayPal and technology companies in the mix, it is an exciting marketplace. Retailer Applications (Apps) Payment applications of select retailers have been extremely successful in driving adoption, for example, the closed loop mobile app of Starbucks has been a roaring success. The company has reported that more than 30% of its US payments are through Mobile & Gift cards. With a patronage of 10 million customers and 5 million payments per week, the mobile app has helped its cause. As the industry debates the pros and cons of retailer apps, it has certainly made a mark. A deep understanding of the customer combined with significant rewards and promotions has helped retailers gain a competitive advantage by providing a better shopping experience and improving loyalty. In addition, it has helped them to relegate the other players. However, being a closed loop payment, acceptance will be limited and will hamper growth. Merchant Consortium Wallets Multi Commodity Exchange (MCX) the cross industry consortium has generated a steady stream of news. The US based consortium with close to 60 big names including airlines, convenience, department and drug stores, and names such as Walmart, Target, CVS, and Southwest Airlines are amongst the keenly awaited launches. With Cloud based mobile technology from Paydiant and Gemalto s Allynis solutions for connecting to retailer apps and FIS for payment processing, the app is very promising. However, it only remains a promise. Service Providers Uber the company that started as an on-demand, luxury black car service in 2010, has grown by leaps and bounds, and has recently launched its service in Beijing (100th City). It uses Google Wallet to power its payment application and despite multiple setbacks and legal battles, the service marches on. 2014, HCL Technologies. Reproduction Prohibited. This document is protected under Copyright by the Author, all rights reserved. 6

5 Mobile Network Operators Mobile network operators in partnership with banks have been very active in Europe. Based on Near Field Communication (NFC) technology, multiple players have launched their services. Telenor, a Norway based operator has partnered with DNB to launch a digital wallet under the Valyou brand. Telefonica and Vodafone in partnership with La Caixa a Madrid based bank, launched commercial payment services using NFC technology. Card Associations MasterCard with its initial launch of Paypass Wallet Services in 2012, and MasterPass suite of services in 2013, has a comprehensive offering in the digital wallet services space. With 30,000 merchants accepting the Masterpass checkout services and growing number of bank partners, MasterCard is making its presence felt. MasterCard connected wallets, a collaborative proposition that enables banks white label and offer their own digital wallet. This offering combines the trust established by the bank with their customers MasterCard s strength in technology, payment processing and merchant acceptance. Visa s V.me digital wallet, marks its foray into the digital payments space. This is a remote payment offering, which enables e-commerce and m-commerce and has been launched in US, Canada and Australia. Visa s paywave a NFC payment technology, is an enabler for third party wallet providers. The collaborative potential is one of the primary advantages that card associations bring to the market place. Along with the banks, they have the ability to tilt the balance in their favor because they command trust and provide a sense of security, which is paramount in financial transactions. Technology Players If there s one company that garners big attention in the mobile payment market, it is PayPal. A leader in online payments, its redesigned digital wallet has features that transform the wallet experience. The wallet allows definition and usage of alternate funding sources such as Gift card, loyalty points and coupons. It allows you to define the rules that dictate spending pattern and source of spending. Other notable features include ordering ahead, paying at the table and in-store payments. Most importantly, PayPal s digital wallet has generated significant brand recall and consumer trust in the marketplace. Multiple surveys conducted amongst different groups of respondents for rating digital wallet offerings have one thing in common PayPal. It is amongst the top 2 in trust and preference for usage. It is a just reflection of the annual mobile transaction volume processed by PayPal in $27 billion, close to a 100% increase from the preceding year. Google Wallet packed with features is making a slow progress in the market place. This could be partly due to its reliance on the NFC technology. Similarly, infrastructure issues and lack of support from Apple have been major stumbling blocks. However, the launch of Google wallet powered by Bluetooth Low Energy could facilitate better adoption. 2014, HCL Technologies. Reproduction Prohibited. This document is protected under Copyright by the Author, all rights reserved. 7

6 Banks and the Digital Wallet Opportunity Digital Wallets Enabling the relevance of Banks Banks, the traditional custodians of money, have been on the sidelines of the digital wallet market space. As the industry and the offerings mature, the importance of being a relevant player is of critical importance. While the low adoption of digital wallets has shielded the banks from adverse impact, the risks of continuing to be an observer are increasing. The following threats can have a significant impact on the way banks operate: y Emergence of alternate players Migration of funds from the bank accounts to the digital wallets as a value container platform. y Interchange revenue loss Shift from card based payments to Automated Clearing House (ACH) based pull payments. y Relegation as a last mile processor Banks may be reduced to a backgroundprocessing unit that moves funds in the last mile. y Data loss Digital wallet providers may withhold customer transaction data from the association and the issuers, thereby shielding valuable data. y Brand and loyalty Loss of trust and the loyalty of the customers. The good news is that the banks have not missed the bus yet. The digital wallet market is picking up and the opportunity in front of them is compelling. There are quite a few factors that favor the banks to gain a strong foothold. Customer Trust When it comes to money, customers trust banks. Multiple surveys from leading industry watchers say this in unison. Financial Data Access to customer accounts and financials enable banks to provide a wholesome wallet. They are in the best position to extend ancillary services such as controls on spending patterns and sources. In combination with the financial advisory services provided by them, banks possess a powerful armory. Relationship with Card Associations Banks and Card associations are natural partners. Both have been threatened by the emergence of alternate players and the market. MasterCard s MasterPass is a collaborative platform that banks can adopt to develop digital wallets without making large investments. Single Source with Wider Acceptance It is a challenge for merchant wallet platforms to promote adoption. Banks in partnership with card associations will find it much easier to drive acceptance across multiple retailers and merchant sites. Natural Extension of the Digital Strategy Most banks have a digital presence in some form and process digital payments. Digital wallet as a value container is the next logical step. It facilitates ease of adoption and can help customers graduate to digital wallet. 2014, HCL Technologies. Reproduction Prohibited. This document is protected under Copyright by the Author, all rights reserved. 8

7 Value Added Services As card issuers, banks are already promoting various types of offers and deals. The presence of this infrastructure will enable the banks to provide and improve the service through a different medium. Conclusion Banks considering a digital wallet journey have to consider the following critical factors: Entry Strategy The foundation for a successful digital wallet is adoption, usage and acceptance. As far as banks with sound digital platforms are concerned, adoption is the least of their problems, because they already have an active digital base. The promotion of usage and adoption presents a key challenge in the form of merchant acceptance. A partner led strategy helps overcome this issue. Partners in the form of card associations and other digital wallet enablers have platforms that have either been in use for some time or have the backing of a powerful network for driving acceptance. Enablers and Partners come with a variety of options including white label and plug-in options. Large banks have entered the market with their own branded wallets that helps them to control branding and customer experience. Given the challenges, banks must be sure of adoption and acceptance before choosing this path. Positioning The emergence of diverse entities is changing the payments landscape drastically. Evolution of technology and disruptive innovation may alter the ecosystem in a manner that may leave a lasting negative impact on the banking industry. Banks should be mindful of this and come out with compelling propositions for customers that ensure that the traditional model and relevance is protected. Agility Technology is a core component in all things digital. Similarly, in digital wallets, it comes in multiple variants. In selecting a technology, it is important to take into factors such as ease of adoption, wide-scale acceptance, and future proofing are critical. Significantly, what is right today may not be for tomorrow, therefore technology must be evaluated based on it s agility to adapt. 2014, HCL Technologies. Reproduction Prohibited. This document is protected under Copyright by the Author, all rights reserved. 9

8 authors Kiran Tappita, Banking Solutions Kiran Tappita is, Banking & Payments Solutions lead for HCL America, and drives the business solutions unit. A seasoned business leader and banking expert, specializing in strategizing and defining the roadmap for large transformational and modernization initiatives for financial institutions. Barath Gopalan, Banking Solutions barath.g@hcl.com Barath Gopalan, Practice Manager, HCL Technologies, specializes in core systems transformation in the lending and payments domain. As a solution leader, he works with clients on Innovation, Value creation, Solution conceptualization & implementation in the niche domains. References caixawallet-a-new-universal-payment-system-for-online-purchases 1775-c html Annual%20Report%202013%20final%20website.pdf For+Your+Financial+Institution/fulltext/-/E-RES99583 McKinsey Report From Solutions to Adoption: The next phase of consumer mobile payments. Celent Report Top Trends in Retail Payments A Year in Review , HCL Technologies. Reproduction Prohibited. This document is protected under Copyright by the Author, all rights reserved. 10

9 About HCL About HCL Technologies HCL Technologies is a leading global IT services company working with clients in the areas that impact and redefine the core of their businesses. Since its emergence on global landscape after its IPO in 1999, HCL has focused on transformational outsourcing, underlined by innovation and value creation, offering an integrated portfolio of services including software-led IT solutions, remote infrastructure management, engineering and R&D services and Business services. HCL leverages its extensive global offshore infrastructure and network of offices in 31 countries to provide holistic, multi-service delivery in key industry verticals including Financial Services, Manufacturing, Consumer Services, Public Services and Healthcare & Life Sciences. HCL takes pride in its philosophy of Employees First, Customers Second which empowers its 90,190 transformers to create real value for the customers. HCL Technologies, along with its subsidiaries, had consolidated revenues of US$ 5.2 billion, as on 31st March 2014 (on LTM basis). For more information, please visit About HCL Enterprise HCL is a $6.5 billion leading global technology and IT enterprise comprising two companies listed in India HCL Technologies and HCL Infosystems. Founded in 1976, HCL is one of India s original IT garage start-ups. A pioneer of modern computing, HCL is a global transformational enterprise today. Its range of offerings includes product engineering, custom & package applications, BPO, IT infrastructure services, IT hardware, systems integration, and distribution of information and communications technology (ICT) products across a wide range of focused industry verticals. The HCL team consists of over 95,000 professionals of diverse nationalities, who operate from 31 countries including over 505 points of presence in India. HCL has partnerships with several leading global 1000 firms, including leading IT and technology firms. For more information, please visit Hello there! I am an Ideapreneur. I believe that sustainable business outcomes are driven by relationships nurtured through values like trust, transparency and flexibility. I respect the contract, but believe in going beyond through collaboration, applied innovation and new generation partnership models that put your interest above everything else. Right now 95,000 Ideapreneurs are in a Relationship Beyond the Contract with 500 customers in 31 countries. How can I help you?