Consumer bill payment: Learning from global archetypes

Transcription

1 26 McKinsey on Payments June 2010 Consumer bill payment: Learning from global archetypes Consumer bill payment is a large and potentially attractive market for payments providers. Globally, consumers pay 75 billion to 100 billion bills annually, generating $25 billion to $30 billion in payments revenue, often at healthy operating margins of more than 25 percent. However, there is no single solution for providers seeking to make inroads or expand in bill payment. Each market has unique characteristics based on how people pay bills and the nature of the billing institutions. The array of bill pay markets does, however, fall roughly into four archetypical models. An understanding of these archetypes is indispensible in shaping bill payment strategy. Christopher McMillen Kausik Rajgopal Clarifying bill payment markets Consumer bill payment refers to the payment of recurring bills for regularly provided services such as credit cards, phone service (mobile and land line), gas, electric, water and insurance. Consumers pay such bills through three distinct channels, and the share of each channel varies significantly across markets: Electronic payment options, such as direct debit and credit, have grown quickly and predominate in many developed economies. Bill payment by mail, using checks or money orders, is still prevalent in several large economies (e.g., U.S., France), but its use is declining as consumers shift to electronic options. Walk-in sites, both biller and thirdparty, are a frequent channel for urgent (that is, same-day) payments in many markets and remain the preferred option for routine payments in cash-heavy developing economies, such as China, Poland and Argentina. Each bill payment market exhibits unique characteristics driven by these differing channel preferences, as well as the countryspecific nature of most billers (e.g., utilities, mobile telecom, financial services providers). For insight into successful market entry and positioning strategies, it is helpful to organize the numerous bill payment markets into governing archetypes. We have identified four such archetypes by quantifying two aspects of each bill payment market: consumers channel preferences and providers ability to monetize these transactions (Exhibit 1). Patterns emerge among the diverse bill payment markets when viewed through

2 Consumer bill payment: Learning from global archetypes 27 this lens, allowing payment providers to craft strategies informed by successes in similar markets. Even within an archetype, however, there are many important marketspecific nuances to consider. Archetype 1: Attractive developed markets This first archetype can be seen in a diverse set of developed Western and Asian economies where bill payment providers have established relatively stable, highly profitable business models. While the characteristics of each market differ substantially, the most profitable payment providers have generated and monetized consumer bill payment traffic through walk-in channels and online urgent channels. The United States is the world s largest bill payment market, both by number of transactions (20 billion annually) and by payments revenue ($6.4 billion annually). It is also the most diverse, with electronic, mail and walk-in channels each contributing a significant portion of overall revenue. While payments revenues have stayed roughly flat over the past few years, the revenue balance is shifting. As U.S. bill payment electronifies, the online channel is stealing share from both walk-in and mail channels. In this evolving market, three winning models have emerged. The largest (by share of transactions) and fastest-growing is the online consolidator model. Retail banks now dominate this space as consumers increasingly use their online banking interface to schedule routine bill payments. Consolidators typically charge low transaction prices ($0.10 to $0.15), however. A second successful approach is the biller direct model for urgent online payments, where consumers pay bills at the deadline (or past due) directly on the biller s Web site. Biller direct accounts for roughly one-quarter of online bill payments in the U.S., but transaction prices are much higher ($0.70 to $0.90) than in the consolidator model, as both consumer and biller typically pay a premium to ensure timely receipt of funds. The third successful model in the U.S. market is urgent walk-in. Though in decline as the U.S. market electronifies, walk-in bill payment remains a highly profitable model for large Exhibit 1 The four market archetypes for consumer bill payment Note: Bubble size reflects the number of bill payment transactions conducted annually Source: McKinsey analysis Revenue per transaction U.S. $ Archetype 1 Attractive developed markets France Spain U.S. Hong Kong Singapore South Korea Germany Canada U.K. Australia Japan Taiwan Italy New Zealand Archetype 2 Lower-margin developed markets Argentina Romania Percent of transactions in cash Brazil Asia Europe / Middle East Archetype 3 Emerging markets Archetype 4 Nascent markets Poland Colombia Chile Thailand India Peru Indonesia Philippines Russia China North America South America Mexico Vietnam

3 28 McKinsey on Payments June 2010 agent networks (e.g., Western Union, MoneyGram) that can cover the major population centers, with transaction prices for urgent payments of $8 to $10 or more. Italy is the world s most profitable bill payment market, with an average transaction price ($0.90 to $1) that dwarfs that of all other major economies. Two factors have enabled Italian payment providers to monetize consumer bill payment at this level. First, Italy is cash-heavy for a developed market: 20 percent of households are unbanked and over 40 percent of bills are paid in cash, resulting in the higher transaction prices associated with walk-in services. Second, across both walk-in and electronic channels, the market is dominated by a handful of players (e.g., banks, Italian post office, Lottomatica) that have conditioned consumers to pay for even routine bill payments. While some transaction price erosion is anticipated as the Single Euro Payments Area (SEPA) asserts regulatory authority, Italy should remain a very profitable bill payment market. In Japan, the majority of consumer bills are paid through automated direct debit, with the low commissions typical of routine electronic payments. However, consumer use of walk-in bill payment services is gaining share. Convenience stores have emerged as the early winners in this market, offering the service free of charge to drive consumer foot traffic while charging billers a transaction price of $0.50 to $1 six to ten times the revenue generated on routine electronic transactions. Another interesting example in this category is Denmark, where the local direct debit product Betalingservice is the standard bill-payment method, but the value-added services offered around simple collection, such as bill aggregation, collections support and commercial enclosure, warrant a rela- Why the Middle East is leapfrogging in e-payment services A unique combination of circumstances has positioned Middle Eastern countries for rapid advances in electronic payment systems. First, many of these countries are still heavily dependent on cash, 1 giving them an opportunity to skip unnecessary and costly steps in payment development, such as check systems and manual transaction forms, and move directly to e-payments. Second, the region s consumers have been quick to adopt new technologies, such as cell phones and smart phones, and are embracing e-payments and other applications. 2 Third, the willingness of Middle Eastern countries to attract foreign investment, their pride in competing with developed countries, and the ready availability of funding are spurring the development of new e-payment systems. All this is good news for e-payment providers both the local and regional banks that dominate the landscape and the international banks, which are typically restricted by regulation to a limited number of branches. Three market segments Middle Eastern countries share one more distinctive characteristic that will shape the strategies adopted by e-payment providers. Their markets divide naturally into three major segments: large low-income expatriate populations, high-income expatriates and the local population. Each group has its own needs. Low-income expatriates are primarily construction and domestic workers from Southeast Asia with an average income of less than $1,000 per month. Few have local bank accounts, and their use of payment instruments is mainly confined to cross-border remittances though official (e.g., banks or money exchange houses) and unofficial channels (e.g., the Hawallah market), and pre-paid phone top-ups. In some countries efforts are underway to provide other non-cash services for this group, such as special electronic accounts for low-value salary transfers, direct debit cards in Saudi Arabia and an e-wage system in the United Arab Emirates. High-income expatriates tend to be regular users of payment applications, frequently for cross-border remittances to their home countries. People in this group typically come from developed countries with a full range of transaction systems such as ATMs, credit and debit cards, and Internet-based transactions. They typically have bank accounts in their home as well as host country. 1 In 2008, cash was used in 90 percent of transactions in Saudi Arabia, for instance. 2 The volume of non-cash transactions is growing by 30 percent a year in Saudi Arabia (source: Saudi Arabian Monetary Agency).

4 Consumer bill payment: Learning from global archetypes 29 tively high price level of $0.80 to $1 per transaction. This direct debit service can operate through paper notification, as well as through Internet banking interfaces. Archetype 2: Lower-margin developed markets Archetype 1 represents a diverse set of developed bill payment markets united by the common theme of generating and monetizing consumer traffic through walk-in channels and online urgent channels. Archetype 2 captures the reverse side of this coin. This archetype is represented by a homogenous set of Western nations where bill payment is dominated by routine electronic transactions. Not surprisingly, transaction prices in these countries are low (typically $.05 to $0.20), with relatively thin payment provider margins. Germany s market is representative. The population is almost universally banked (98 percent), and billers are highly consolidated with the top six issuing nearly one-third of all consumer bills. Germany s large billers have used these market characteristics to their advantage, aggressively enrolling subscribers in automated monthly bill payments from their bank accounts. As a result, direct debit holds an 80 percent share of all transactions, and bill payment transaction prices average only 0.10 ($0.12). A similar story plays out in the other developed markets of Western Europe and in Canada and Australia. Driven by a varying mix of economic, cultural and regulatory factors, these highly banked populations rely heavily on direct debit for bill payment. Routine electronic transactions at very low revenue have thus come to characterize this archetype. Archetype 3: Emerging markets The final two archetypes exist outside of the The local population is adopting mobile and smart phones in large numbers as they participate in the rapid development of their countries. Their payment needs are similar to those of high-income expatriates except for remittances. A regional scan On the individual country level, clear differences emerge in the steps providers are taking to develop innovative payment instruments. In the United Arab Emirates the dominant applications are smart cards and contactless payment methods (such as payment cards for the newly built Dubai Metro and other transport systems) and mobile payments for settling parking fees on the spot. In addition, the national ID smart cards launched by the government in 2009 provide a basis for future identification and payment applications for a multitude of e- services including government payments. In Saudi Arabia there has been rapid adoption of electronic bill payment and presentment through the SADAD payment platform, with around 70 million transactions in 2009, representing more than 30 percent of all non-cash payments. This puts the country ahead of the curve in introducing electronic bill payment, a new technology even in developed economies. However, the country lags behind in other areas, such as point-of-sale e-payment transactions (an average customer completes only about nine per year), and credit cards (which accounted for only 6 percent of all card transactions in 2008). Across the region as a whole, rapid developments in the payments industry are fuelling the appetite for further innovation. Commercial banks are introducing cutting-edge, mobile-enabled remittance solutions. Retailers and mobile service providers are exploring partnerships with banks to reduce churn and enhance value for customers. Government bodies are becoming increasingly aware of the benefits of e- payments for financial systems and are taking bold steps to support or even spearhead these developments, building e-invoicing platforms and refining regulation to encourage new modes of payment. Payments players that embrace these changes are likely to emerge as winners, not only building customer loyalty, but also reducing their cost of funding despite the expected increase in interest rates. Mehmet Darendeli is principal, and Michael Glück is a consultant, both in the Dubai office.

5 30 McKinsey on Payments June 2010 developed markets in the remaining cashheavy economies and are distinguished by their relative stage of development. The first, emerging markets, comprises several Eastern European, Middle Eastern and Latin American markets. Bill payment is still evolving in this archetype. The average household already pays five to eight bills per month. However, electronification is in its early stages, and walk-in cash channels will hold significant share for the foreseeable future with attractive transaction prices. Over the long term, some markets in this archetype may have the opportunity to leapfrog to new payments technologies, depending on the actions of incumbents, new entrants and government bodies (see sidebar, Why the Middle East is leapfrogging in e-payment services ). Russia is the largest of the emerging bill payment markets, with over 4 billion transactions annually. Walk-in channels comprise 80 percent of bill payment volume and are marred by inefficiency. As in many Eastern European markets, banks and post offices administer roughly two-thirds of Russia s walk-in volume, typically forcing consumers to wait in long lines and complete cumbersome paperwork for each transaction. As the market liberalizes, this inefficiency is spurring innovation from new entrants. CyberPlat has taken a leading position in the fast-growing mobile top-up market by building a distribution network of over 200,000 locations, including ATMs, pointof-sale terminals, self-service kiosks and online/mobile payment sites. Start-up firms Avtokard and OSMP/QIWI have made a similar push to improve the consumer walkin bill payment experience. Brazil, like Russia, is a large emerging bill payment market with approximately 4 billion annual transactions conducted primarily through walk-in channels. However, unlike Russia, Brazil boasts one of the most sophisticated walk-in payment networks due to its bank-led Boleto Bancario system. Under this model, many billers actually outsource the issuing of bills (boletos) for a fee to the banks, which have established a universal exchange system allowing consumers to pay any boleto at any Brazilian bank. This model has become further entrenched as the major banks sign up retail networks (e.g., lottery kiosks, post offices, supermarkets) as correspondent locations, extending the geographic reach of their walk-in networks. The Boleto Bancario system now processes 40 percent of Brazilian bill payment transactions, rendering market entry by non-banks quite difficult. Archetype 4: Nascent markets The final archetype is represented by a number of developing economies, primarily located in Asia, for which bill payment is in a much earlier stage of evolution. The average household pays relatively few bills per month (two to four). Thus, consumer preferences are still forming, and the endstate across electronic, mail and walk-in channels is unclear. (In fact, markets such as Vietnam and Algeria have a fourth channel: door-to-door collections.) Transaction prices are low given the relative economic underdevelopment of these markets, but growth rates are tantalizing. China is the largest of these nascent bill payment markets, with an estimated 9 billion transactions annually at relatively low prices ($0.10 to $0.20). Traditionally, most consumers have used the walk-in cash services provided by banks, the postal service and the billers themselves, while a sizeable minority have utilized electronic debit for bill payment. However, new online payment services could significantly shift consumer behavior as the market matures. Early leaders such as Alipay and Tenpay have built transaction scale by integrating tightly with online marketplaces (e.g., B2B exchanges, auction sites) and are now expanding their services into adjacent fields such as consumer bill payment. Time will tell whether Chinese consumers gravitate toward these online third-party solutions or continue to prefer more traditional bill payment channels. India is another bill payment market in its early stages. A majority of consumers use

6 Consumer bill payment: Learning from global archetypes 31 walk-in cash channels today, with greater emphasis in India on biller service centers and less on banks due to the highly unbanked nature of the population. Banks have, however, staked out early leadership in the small but high-growth online bill payment space. New third-party consolidators are challenging the incumbents, both walk-in and online, with a focus on improving the customer bill payment experience. For example, Easy Bill has launched India s first chain of one-stop payment collection centers, while Bill Desk offers a centralized hub for electronic bill presentment and payment. As in China, the Indian bill payment market is just entering its formative years, and winning business models will be in flux for some time. Using the Archteypes Bill payment providers or those seeking to gain a foothold in this market should use the archetype framework to assess the scope, geographic focus and long-term defensibility of their market entry and positioning strategies. As an example, new market entrants particularly within the electronic channel are best served by focusing on emerging and nascent markets, where consumer behaviors are shifting and incumbents are not yet entrenched. Of the two, nascent markets provide greater potential long-term growth and a tantalizing opportunity to influence consumer behavior. A scan of the bill payment archetypes provides important lessons for incumbents on what has and has not worked in defending and monetizing existing positions. For example, consumers and billers have consistently proved willing to pay a premium for online urgent and walk-in payment services versus routine e-payment services. For incumbents in markets that are still in flux, this strongly suggests where the value is likely to accrue longterm. Also, notable successes in building barriers to entry (e.g., Brazil s boleto system) illustrate tactics incumbents can use to their advantage. Strategic questions for global bill payment providers Armed with a clear understanding of these archetypes (as well as the nuances of each individual market), payment providers with global bill pay aspirations should begin by answering the following set of questions: What assets and capabilities give us a sustainable competitive advantage in the bill payment market? How does this assessment vary among electronic, mail and walk-in channels? Are we well positioned to compete at scale with a high-volume, low-price model? Or are we better suited to target specific countries, verticals or niche payment types with high transaction prices? Can we transfer certain aspects of our bill payment model from one country to others? Or must our entry strategy be highly tailored towards each individual market? In which situations will regulatory constraints, market realities (e.g., presence of established competitors, novel consumer preferences) or our own timeline favor a buy versus build approach? To what extent should emerging payment types (e.g., mobile) play a role in our global bill payment strategy, and will this role vary substantially across markets? What value-added services to both collectors and consumers can justify increased pricing in each individual market? * * * Each bill payment market is unique, and there are limits to the inferences one can draw from any simplifying construct. However, the archetype framework can be a powerful tool for plotting strategic options in this attractive business. Christopher McMillen is a consultant in the New York office, and Kausik Rajgopal is a principal in the San Francisco office.