CAPCO MOBILE PAYMENTS, A EUROPEAN PERSPECTIVE

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1 CAPCO MOBILE PAYMENTS, A EUROPEAN PERSPECTIVE

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3 M O B I L E P A Y M E N T S, A E U R O P E A N P E R S P E C T I V E WHY AND HOW BANKS SHOULD ACT NOW!

4 4 The majority of banks have been content to allow payment standards to be established, then to follow the status quo. Today, however, mobile payments and mobile commerce have transformative capabilities. These threaten banks fundamental relevance in the payment ecosystem. To succeed in the mobile payments space, they need to add value beyond their current role as infrastructure providers and simple payment enablers. Why? Competition from non-traditional players threatens to disintermediate the bank to customer relationship. Merchants need better opportunities to engage with consumers to create rewarding purchase experiences. And customers need to swap wallets bursting with cards and coupons for a simpler, universally accepted and bank- provided payment facility. A model that benefits banks, merchants and consumers can become the new status quo. Nirvana? No! It can be done and we should start now. PREVIOUSLY - ON CAPCO S PAYMENTS POINTS OF VIEW This is the second part 1 of our series about changes in payments. In this paper, we focus on the channel perspective. We outline a solution to introduce flexibility, enable faster innovation and, ultimately, achieve a dynamic and positive mobile payments 2 environment.

5 5 OVERVIEW Across the spectrum of players - global financial institutions, large technology organizations and small start-ups there is frenetic activity. Its goal? To create the mobile payments ecosystem of the future. For consumers, a multitude of branded apps 3 is appearing. But nobody has so far delivered nirvana: a single, easy, universal payments and rewards facility. Our wallets still bulge with a whole range of credit cards, bank and loyalty cards and coupons. Meanwhile, real changes are being experienced by the traditional players. Some of these 4 are systemic, obliging banks to take part in advanced payments systems. This can lead to new possibilities and productive results, such as the introduction of PingIt 5 (Barclays). Yet although payment infrastructure providers including Master Card and Visa have launched mobile apps as have leading global financial institutions most of their solutions are still in the process of reaching significant traction. Typically, it s the high profile alternative payments facilities that are rapidly transforming into major brands. And they are eroding the established players share of markets and revenues. Apple Pay is the latest and perhaps highest profile arrival of all in the space. It cleverly leverages desirable hardware and pre-existing payments technology elements to create a new consumer payment experience. BUT it does not represent an advance in the underlying infrastructure of the payments ecosystem. Yes, it has great potential for payments volume stimulation, especially in the U.S. However, that volume will place strain on the infrastructure as it is currently configured. Nor will the additional business come for free. In the U.S., Apple is taking a certain share of the interchange fee from issuers and will undoubtedly look for a growing share of transaction revenues from the banks. So, in summary, we have a payments scene that is challenging banks previous dominance. Yet it is not providing a single, holistic environment for consumer convenience and enhanced retail experience. Why? We believe there is a missing piece still needed to complete the puzzle. That missing piece is interoperability. In this paper, we explore a new approach to building interoperability into payments. The prize is a scenario where banks and financial technology companies are able to collaborate effectively. They can extend their businesses to create value for all participants in the mobile payments ecosystem. It s a bold vision. We believe it can be made real. M O B I L E P A Y M E N T S, A E U R O P E A N P E R S P E C T I V E

6 6 Current payments model Layers 1. CHANNELS Mobile applications Customer front-ends Access providers (cards) 2. INTERMEDIARIES Banks Payment service providers Acquirers Processing centers 3. INFRASTRUCTURE Automated Clearing House (ACH) Messaging services (SWIFT) Central banks / Liquidity providers Foreign exchange platforms FIGURE 1. THE THREE LAYERS OF CAPCO S SIMPLE PAYMENTS MODEL Our definition of mobile payments majors on the area where the market currently has its focus. In our Simple Payments Model (see the exhibit above) it is represented in the channels layer. Some adjustments are needed at the intermediaries layer (acquirers, terminals, POS solutions) to accept mobile payments at the end of the process. In the search for the best (defined as the most convenient) customer experience, the main problem is always how the platform utilized is funded initially, to enable point-to-point transactions within the whole network beyond closed platform solutions. Intermediaries challenging the current banking model (e.g. PayPal) focus on easier-toobtain money transmitter licenses as financial service providers. This creates a high degree of dependency. There is a need to utilize the global reach of existing banking network structures to fund the services being offered. To obtain the necessary funding, a mobile payments platform needs to be connected to a payment aggregator. In the retail space, financial institutions almost exclusively control the payment aggregator function. They

7 7 are the only actors in the system today that provide access to the infrastructure layer - where liquidity is obtained and where risk mitigation via clearing houses takes place. At present, channel models typically rely on a capability to solve unique and isolated problems and specific needs. They build their market profile through providing single product-centric solutions. THE SIMPLEST Simple, limited problem focused THE SOLUTIONIST Merchant focused THE BLENDER Multi-problem solution THE SOCIALS Peer-to-peer & experience focused FIGURE 2. DIFFERENT CHANNEL MODELS MAPPED TO UNIQUE PROBLEMS All the payments industry initiatives that have come to market rely on limited technology solutions. Once they have made their choice of channel infrastructure models (Near Field Communication - NFC/Bluetooth Beacons/Quick Response - QR codes) they tend to stick with it. What they all have in common is obligatory interaction with financial institutionowned bank accounts. As the system functions today, this interaction cannot be replaced. M O B I L E P A Y M E N T S, A E U R O P E A N P E R S P E C T I V E

8 8 KEY DEVELOPMENTS DISINTERMEDIATION OF FINANCIAL INSTITUTIONS For the past decade, banks have taken a fundamentally defensive stance towards changes in the payments market (instead of creating new opportunities through innovation). They have relied on high barriers to market entry to protect share, transaction volume and revenue. Developing technical capabilities to meet evolving customer needs has not, until late in the game, been a priority. And even with new technology developments and the introduction of mobile capabilities, the banks reactions have led with bank-centric thinking. "How can I profit?" "How do I protect my share? This stance has left consumers feeling neglected and even emotionally detached from their bank 6. This leaves the industry badly exposed as a prime target for disintermediation in the payments space. And disintermediation, once a superior business model gains traction, can be swift and devastating 7. Current service models offered by the banks are typically not meeting consumer needs in a digital, mobile environment. As a result, other players are entering the market to fill the gaps. According to the Advanced Payments Report 8, alternative payments providers such as PayPal are currently in the lead with driving growth in the mobile payments space (85%). They are followed by card networks (82%), then web-related companies including Amazon (77%). Significantly, banks and financial institutions are in fourth place (76%). This is not even a secure position: they are being closely pursued by emerging alternative players such as Google (74%).

9 9 FIGURE 3. INHABITANTS OF THE NEW PAYMENTS COMPETITIVE LANDSCAPE We now see a combination of consumer dissatisfaction with existing models, growing demand and volumes, the promise of rapid growth and stellar emerging brand profiles. It is not surprising that tapping into the mobile payments market is so attractive to outside players. There are significant profits to be made by newcomers, even if a solution remains a niche product. (The important factors are that it is scalable, technology driven and cheap.) M O B I L E P A Y M E N T S, A E U R O P E A N P E R S P E C T I V E

10 10 WHAT DO YOU NEED TO REALLY MAKE IT IN MOBILE PAYMENTS? Does the mobile payments market need to be served through reaction to existing demands? Or does it need to be created by presenting consumers with innovations they hadn t previously thought about? 9 What do you need to offer in order to really make it in mobile payments? There are six core attributes of a successful offering: Comprehensive Consider the whole retail customer experience and purchasing process, not just payments or wallet functionalities. Extendable Enable add-ons such as coupons and loyalty schemes, to enhance the experience for consumers and value to merchants. Trustworthy Build in fast authentication and rock solid security. Offline too Offer an offline solution to extend convenience of usage. Interoperable Participate in a system that enables real interoperability between channels, intermediaries, markets and regions (globally). Analytical Enable data analytics and generate new revenues from data-derived insights fully under the control of the consumer. What we need going forward is a clear, robust, bank-driven model. It consists of only four parties banks themselves, merchants, consumers, and financial technology (FinTech) providers (as technical enablers). It brings value to the other parties: creating meaningful benefits for merchants and consumers too. (Please refer to the exhibit on the next page for a schematic view of our proposed new model.)

11 11 FIGURE 4. FOUR KEY ACTORS, ONE ROBUST PAYMENTS MODEL DRIVEN BY INTEROPERABILITY What are the roles of the four key actors in our model? And how will the interactions between them work out? BANKS will remain the entity that owns the customer s current/checking accounts - as the primary accumulation point of funds from salary payments. Banks will provide merchants with the ability to build a stronger connection to their customers (consumers) and merchants will benefit from the technology-driven advantages of processing mobile payments. M O B I L E P A Y M E N T S, A E U R O P E A N P E R S P E C T I V E

12 12 MERCHANTS will enable the mobile purchase/ payment experience with their POS solution. They will benefit from extended capabilities to reach their customers through analytics driven, highly personalized loyalty and couponing offers. These personal touch points will be supported by immediate, mass-oriented in-store offerings. Tailored consumer use cases specific to the merchant business can be enabled 10. The use of mobile applications will support advanced analytics. These will help merchants develop very highly detailed insights into their customers behavior, to improve the retail consumer experience. CONSUMERS will have direct control over the information they provide to merchants. At their discretion, and always under their control, consumers can earn incentives for granting access to their data. Importantly, payment information is no longer stored on a card or saved on the device. Instead, it is available in a secure, tokenized cloud environment. Only the actual authentication process will be carried out on the device. At this point, the consumer can choose any convenient authentication 11 mode from PIN, password, fingerprints or face recognition, enabled by their smart device. FINTECH PARTNERS will deliver the software and architecture required to run the payments environments and connect the other three parties in the most efficient and effective way possible. A smart, cloud based payments network will be provided (aas) and will add network based business functionalities. Pre-existing infrastructure elements will be utilized and put in place to build and implement a concept that is thoroughly tested and stable. From our perspective, we believe that the model we are proposing offers an ideal environment for mobile payments to thrive. For the other actors to share our view however, all parties need to see an immediate benefit. That benefit will derive from interoperability and the resulting control over all their payments activity, in every situation where they happen to need the service. How will the different groups benefit in reality? MERCHANTS will profit from a significantly reduced transaction-based cost (since the model will remove intermediaries). They can invest in more value adding offerings and digitally enabled retail experiences for their customers.

13 13 CONSUMERS will, at last, be in convenient control of their personal finances. They will have access to more data across all the accounts they might be using at any one time and more control over their money and spending. BANKS Short-term, banks will retain their essential role in the payments value chain. But internal change will be imperative, to prepare the organization and its technology for new challenges 12. Longer-term, banks will evolve beyond their current role as sole infrastructure providers and payments collectors. The use of new approaches and increased IT capabilities will enable bank account-derived information to play a full role. Banks will share the benefits of increased information and richer customer data with network participants. They will be able to offer data services that will drive increased ROI. And this model will be integrated into other lean and popular mobile services, acting as part of the larger payments ecosystem. FINTECH A technology driven and future proof approach is needed to transform the mobile payments space. FinTech companies with capability driving large scale banking innovation will support transformation. THE PAYMENTS BRIDGE, BUILDING THE NECESSARY FLEXIBILITY Immediate actions must focus on building an IT architecture to prepare today s infrastructure for tomorrow s challenges. As part of preparation, Capco has already introduced the payments bridge to financial organizations (see Capco s POV Act Now Pay Later ). This can be seen as a core banking casing that will enable state-of-the-art connectivity. It will introduce functionalities to support a real-time-based mobile payments environment. To support operations during change, it will keep the current core intact. And it will handle core/system replacement or decommissioning at a later stage. M O B I L E P A Y M E N T S, A E U R O P E A N P E R S P E C T I V E

14 14 CONCLUSION A positively different model and technology approach, such as the one outlined in this paper, will trigger the following changes in the mobile payments ecosystem and the role of banks within it: From a cash cow under threat to a dynamic new marketplace, with real value adds for all the parties involved. From defense/protection to an open, forward looking approach. From fragmented solutions to a cohesive, digitized value-adding consumer experience. From outmoded high cost payments processing to ultra-low-cost, industrialized handling. From banks as low/no value-add, progressively disintermediated actors to high valueadding insight aggregators and market and innovation facilitators. The bottom line? Convenient mobile payments with real consumer appeal, along with other innovations, can be directly enabled using new technology. And they will be adopted at speed by the market. Mobile payments, and the wider payments market, can now think in considerably more ambitious terms than one off novelties and limited disruption. We are talking about complete, and positive, transformation, through system-wide interoperability. We have the technology solutions to make it happen. The next paper in this series will explain integration and the suggested MOBILE PAYMENTS ecosystem in greater detail. It will explore the brand new concept of consumers taking control of their data, transactions and money flows. The series will conclude with an infrastructure perspective to complete our vision of an innovationdriven, integrated, end-to-end PAYMENTS transformation.

15 15 1. Part One Act Now or Pay Later introduced the concept of a payments bridge ; configured to enable much needed operational flexibility around a core infrastructure. 2. Payments initiated, authenticated and completed using a mobile device or smart mobile technology and focused on the retail sector. This definition applies to anything from mobile phone enabled payments (think in Global System for Mobile - GSM - terms) to more sophisticated solutions, using fingerprint authentication and other technology innovations that impact the payments process (tokenization, Host Card Emulation HCE - etc.). 3. In the absence of a truly comprehensive solution, some retailers have created their own apps to enhance a digital customer experience. (Starbucks is one high profile example.) 4. Such as the UK Faster Payments Service (FPS), introduced in 2008, live in 2012, with a regulation change to settle all standing orders within a time frame (1 day) that only FPS can provide. This in turn forced a move of specific transactions to FPS and stimulated an estimated 20% increase in transaction volumes. 5. PingIt has enabled three million users to send an estimated 600m GBP since According to Time Magazine, some 71% of the Millennials (birth years from the 1980s to the 2000s) would rather visit their dentist than listen to a bank s message. For 53% of them, all banks are the same and over a third would switch their bank account within the next 90 days. 7. Example: the video and game rental business. In its current form it is one of the fastest dying industries, fatally eroded by newly available on-demand rental (no late fees, convenience of renting from home, no need to return physical product, much lower cost model). It is strong proof that a better business model for providers and consumers will change the status quo, forever. 8. Edgar,Dunn,Co: Advanced Payments Report Steve Jobs provides a high profile example of steering a company with his view that people don't know what they want until you show it to them. This is a dangerous (to existing players) but convincing (to consumers) argument, and one that can easily be applied to current developments in mobile payments. 10. Examples include Pay at the pump (gas stations), Pay at the table (restaurants), Window shopping (buy goods displayed in a window space) and many others. 11. Further, even more secure methods will evolve over time and they will become available through a next generation of smart devices agnostic in relation to the underlying mobile payments ecosystem. 12. The change cycle will need to be technology driven, in order to enable future developments and to end reliance on the current platform. M O B I L E P A Y M E N T S, A E U R O P E A N P E R S P E C T I V E

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17 Bernd Richter is a Capco Partner. Bernd s core areas of expertise are in market-entry and growth strategy, product development and pricing, pre-merger management and postmerger integration. He has deep domain knowledge of key areas including international payments, cash management, trade services/ finance and financial supply chain management, and cards (acquiring/issuing). [email protected] Markus Sander is a Capco Senior Consultant specializing in operating model design and transformation in capital markets, banking and trading environments. He has broad industry experience spanning securities, trade automation, derivatives and international payment and clearing systems. [email protected] ABOUT CAPCO Capco an FIS TM company is a global business and technology consultancy dedicated solely to the financial services industry. We work in this sector only. We recognize and understand the opportunities and the challenges our clients face. We apply focus, insight and determination to consulting, technology and transformation. We overcome complexity. We remove obstacles. We help our clients realize their potential for increasing success. The value we create, the insights we contribute and the skills of our people mean we are more than consultants. We are a true participant in the industry. Together with our clients we are forming the future of finance. We serve our clients from offices in leading financial centers across North America, Europe, Africa and Asia. WORLDWIDE OFFICES Amsterdam Antwerp Bangalore Bratislava Charlotte Chicago Düsseldorf Frankfurt Geneva Hong Kong Johannesburg London New York Orlando Paris San Francisco Singapore Toronto Vienna Washington DC Zürich To learn more, contact us in the UK on , in Continental Europe on , in North America on or visit our website at CAPCO.COM 2014 The Capital Markets Company NV. All rights reserved. T EU

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