2015 BUSINESS TRENDS AND TECHNOLOGY ENABLERS PAYMENTS AT A CROSSROADS OVUM.COM @OVUMICT

2015 BUSINESS TRENDS AND TECHNOLOGY ENABLERS PAYMENTS AT A CROSSROADS OVUM.COM @OVUMICT

OVUM S PAYMENTS RESEARCH STREAM The payments industry is undergoing huge change and disruption. What was once a bank-centric and supply-led business has been dramatically altered by new entrants and rising end-user expectations. Ovum s new Payments research stream delivers an unrivalled blend of research, data, direct analyst engagement and consulting services to help players from across the value chain make the right strategic decisions. Ovum uniquely provides full line of sight analysis across the evolving payments landscape as well as in-depth vertical insight for individual players. This unrivalled capability is founded upon our team s long standing expertise in financial services, technology and telecoms industries. This research extract from Ovum s 2015 Trends to Watch report identifies the key 2015 business trends and technology enablers for payments and is followed by a summary of our 2015 Payments research agenda. Please contact us to find out more about this service, and how Ovum can help your business. ABOUT OVUM Ovum is a market leading research and analysis firm focussed on converging IT, telecoms and media markets. 01 UNRIVALLED DEPTH OF EXPERTISE ACROSS IT, TELECOMS, AND MEDIA 02 GLOBAL COVERAGE 180 ANALYSTS IN 23 RESEARCH OFFICES WORLDWIDE 03 NO.1 TELECOMS INDUSTRY RESEARCH PROVIDER We create tangible business advantage for our customers by providing actionable intelligence that can be relied upon in evaluating market and technology opportunities, benchmarking performance, and making better business-critical decisions. IT 72 analysts 17 research services 6 data tools Working with Ovum puts at your disposal: 180 analysts, each with on average more than 10 years industry experience the largest IT decision-maker survey 10,000,000+ market data points We are part of Informa Group, the world s leading provider of business intelligence. Informa has over 6,000 employees and delivers specialised information to companies operating in sectors including agriculture, consumer, commodities, energy & utilities, financial services, healthcare and pharmaceuticals, maritime, telecoms, media, and IT. TELECOMS 91 analysts 14 research services 7 data tools A 360 degree view across converging markets MEDIA 17 analysts 3 research services 1 data tool 02 2014 OVUM. ALL RIGHTS RESERVED. OVUM.COM

Payments at a crossroads The payments market is changing at an accelerating rate, and 2015 is already shaping up to be a pivotal year in payments evolution. With payment diversification growing exponentially, the ecosystem of services, technologies, and service providers continues to become more complex and crowded. This poses both potential risks and benefits for payment players that are proactive enough to stay ahead of the curve when it comes to the key trends impacting payments in 2015 and beyond. Ovum view The payments market in 2015 will see enterprises and vendor has payments roadmaps solidified and entrenched, following the release of Apple Pay in 2014, which acted as a catalyst for broader action. Many merchants and other enterprises have taken a wait-and-see approach to the market, but Apple making its payments strategy clear is forcing payment providers of all types to commit to a path for broader payments investment and innovation. Payment vendors will continue to consolidate and converge services, helping enterprises to navigate through a complex payments landscape as they commit to a strategy. This, along with regulatory pressures and the need to respond nimbly to new payment developments, will necessitate investment in payment infrastructure modernization. From a technology perspective, near-field communication (NFC) is likely to see renewed and highly visible interest in 2015, following the development of host card emulation (HCE) and Apple s support of the technology. Although this will help to drive business models in the mobile payment space, NFC will not be the only technology area to see investment. On a broader level, cloud-enabled and full end-to-end payments management will become more prevalent across the value chain. Security in particular is likely to see major investment in the near term, as merchants and banks increasingly focus on tokenization and point-to-point encryption (P2PE) technologies. Bluetooth low energy (BLE) and location-based services will also continue to expand rapidly, as merchants and payment vendors increasingly place payments at the center of broader omnichannel retail capabilities. Key messages Investment in payments is growing, driven by regulatory drivers, legacy system modernization, and the need for greater capacity. Payments innovation shows no signs of stopping. The market is in a sustained period of change and development. Payment roadmaps are solidifying in the wake of the launch of Apple Pay. Regardless of Apple Pay s long-term potential, a wait-and-see approach to payments innovation is no longer valid. The payments market is entering a consolidation phase, as incumbent players seek to expand their capabilities in end-to-end service provisioning and high levels of investment in the start-up space drive competition. Payment platforms are creating a framework for value-added services through the opening up of APIs and a focus on the developer community. The use of transaction data in particular will be critical for a host of value-added services. 03 2014 OVUM. ALL RIGHTS RESERVED. OVUM.COM

Business trends and technology enablers Infrastructure is seeing renewed investment Driven by both overall growth in payments and broader payments diversification, investment in payments is now growing. After belt-tightening exercises brought about by the global financial crisis, most financial institutions are now in a better position to invest in payments infrastructure. Early modernizers are now beginning to reap the benefits, and competitive pressures will drive further investment. The payments divisions of many banks took a severe hit as a result of the global financial crisis, with record levels of defaults and consumers in many markets paying down existing debts and deleveraging household debts. This, combined with increased restrictions due to regulatory pressures on interchange, meant that payments have not been a major priority for many banks and payment providers in recent years, and investment in payments infrastructure has been subdued. This has not been the case in emerging markets, or indeed in some aspects of payments, such as debit cards. Overall levels of electronic transaction volumes and values remain high globally, driven by the shift to electronic payments over cash, and this remains a major global opportunity. With the rebound in most banks fortunes, the market is now poised to see a broader level of investment in critical payments infrastructure, including in payment switch, processing, and payment hub technologies. This modernization of infrastructure is critical in enabling a broader array of payment services for payment providers and merchants alike. Ovum s 2014 ICT Enterprise Insights survey of global banking IT executives shows that 45.4% plan to increase their spending on payments over the next 18 months, with 14.8% increasing spending by over 6% (see Figure 1). In contrast, 40.4% of respondents globally report they will maintain their spending at current levels, the most popular single response. These figures likely mask already increased levels of spending over the past 18 months. More critically, they highlight that payments is no longer an area of cost-cutting: only 14.2% of banks globally report that they will be decreasing their investment in payments in the next 18 months, and this figure is likely to decline in the near term as infrastructure modernization gains pace across the market. 04 2014 OVUM. ALL RIGHTS RESERVED. OVUM.COM

Figure 1: Banks IT spending plans for payments in the next 18 months Source: Ovum ICT Enterprise Insights (494 respondents) Payment investment does not exist in a vacuum, however, and much investment in payments infrastructure is happening in conjunction with efforts to modernize other banking technologies. In most instances, the shift to digital channels is a critical priority, and this is helping drive a broader shift in IT spending within the banking environment. Investment is being driven by compliance demands, modernization needs, and capacity considerations Investment in payments infrastructure is being driven by three key factors: regulatory and compliance demands; modernization of legacy infrastructure to help enable innovation; and capacity consideration, particularly in high-growth emerging regions, where the volume of electronic transactions is growing. These drivers are equally applicable to banks and merchants, and will continue to have an impact on the broader payments ecosystem for the foreseeable future. Regulatory issues remain the biggest driver of investment in payments, and will, of course, vary dramatically by region. Regulatory and compliance considerations notably include the shift to EMV in the US, the Single European Payments Area (SEPA) in Europe, the revised Directive on Payments Services (PSD2) and Immediate Payment initiatives such as the New Payments Platform (NPP) in Australia, and upcoming services in India and Hong Kong. Alongside these wide-scale initiatives are a host of smaller-scale, often localized programs, including those to increase financial access for the underbanked and to drive electronic transaction growth to help combat tax evasion. Regulatory activity shows no signs of slowing and the environment is likely to become more complex over time. 05 2014 OVUM. ALL RIGHTS RESERVED. OVUM.COM

The US rollout of EMV in particular will be a major driver of investment in 2015. The paymentnetwork-mandated liability shift for counterfeit cards comes into effect in October 2015, and early indications suggest that much of the market both banks and merchants is far from ready. The total cost of the US EMV switch is estimated to range between several billion dollars to tens of billions, so this will be a major revenue source for payment vendors over the coming years and a major focal point for payment investment. In many mature markets, payments infrastructure continues to run on aging legacy platforms, many of which have been in use for several decades and are at the end of their natural lifecycle. These platforms were never designed to cope with the payments diversification that has since dramatically occurred, and this is increasing maintenance costs and complexity for banks, payment providers, and merchants, while also limiting capabilities for innovation and new product flexibility. Modernizing these legacy platforms will enable the next wave of payment services, and at the same time, in many instances, reduce running costs. Unsurprisingly, for many critical payment infrastructure technologies such as payment hubs and switches, there is a growing emphasis on having a high level of flexibility and configurability in both their design and marketing. Creating stable payment infrastructure frameworks gives banks, payment providers, and merchants the ability to innovate on a more agile and competitive basis. The growth of payments in many emerging markets and high-growth regions means that banks and payment providers have already had to invest heavily in payments infrastructure in recent years to help meet demand. The growth of digital channels, particularly in mobile payments, is further increasing overall payment volumes, and this will also drive investment in payments. Table 1: Business trends and technology enablers for payments in 2014 Operating environment The competitive environment has been galvanized by the launch of Apple Pay, which is solidifying long-gestating payment roadmaps. Interchange rates remain under pressure in most markets, leading to demand for new revenue streams and/or cost-savings from banks. Continued high growth in emerging payments markets is driving investment in infrastructure and, in many instances, enabling leapfrogging straight to digital channels. Drivers and barriers Legal and industry-specific mandates such as for EMV, SEPA, and immediate payments, will reach critical junctures in 2015. Growing demand for simplified payments-as-aservice from merchants is driving growth for new entrants and increasing overall competitive pressure. 06 2014 OVUM. ALL RIGHTS RESERVED. OVUM.COM

Business strategy Operational efficiency and cost control will remain requisites, but priorities will shift toward revenue growth and the introduction of value-added services. To support revenue growth, banks will focus on customer experience and product innovation. Technology enablement Digital channels, particularly mobile, will remain priority IT investment areas to improve customer experience and drive automation. Customer analytics will also see strong investment, particularly projects focused on loyalty and digital marketing through payments. Tokenization and P2PE technologies will grow in importance as merchants seek to lower payment card industry data security standards (PCI DSS) liabilities. Source: Ovum Recommendations Recommendations for enterprises Avoid siloed thinking With the retail payments market galvanized by the launch of Apple Pay and the advancement of HCE and tokenization technology, the need to progress and solidify payments roadmaps is critical; a waitand-see approach is no longer valid. 2015 will not necessarily see the tipping point for mass-market mobile payment adoption, but it will see merchants and banks develop long-term payment strategies. Banks currently hold an advantage, given their existing payment relationships and established levels of trust with consumers and merchants. Mobile banking in particular has already proven an enormous success in terms of engagement, and payments are a natural extension of this. Many banks and merchants are hindered by an overly product-led and siloed approach, with payments as one particular product or activity separate from others in the organization such as marketing, in a merchant environment, or current/checking accounts, in a bank. Keeping payments a separate category is likely to lead to poor roadmap development, and risks missing out on the significant omnichannel possibilities that the shifts in payments are bringing about. Consumers and corporate end users do not have siloed perceptions of their payment providers, and failure to address this will limit the overall potential of payments. 07 2014 OVUM. ALL RIGHTS RESERVED. OVUM.COM

Prepare for continual innovation Payments diversification shows little signs of slowing, and will continue in new and unexpected ways for the foreseeable future. This means banks and merchants need to stay abreast of the latest developments and new entrants, and remain aware of the benefits and risks that these new technologies and players create. To remain adaptable to these developments, the modernization of legacy payments infrastructure is critical. In the past, payment developments happened over decades, but timescales are shortening dramatically and expectations are moving rapidly. Enterprises will only be able to remain agile in the face of these changes and maintain their competitive positioning by creating a stable infrastructure framework that is capable of enabling these new transactions and added-value services of nearly any type. Recommendations for vendors and service providers Focus on the global market The US is the world s largest payment market, but it is not the only one. Although many high-profile initiatives in payments today stem from the US, largely due to its sheer scale, focusing on this market alone risks ignoring much of the innovation and development occurring globally, which can provide clear and valuable lessons for any market. The US is a big and exciting market, but it is marked by features such as its extremely fragmented infrastructure, its lack of Europay, MasterCard and Visa standard (EMV), and its lack of a unifying regulatory authority. Generalizations about payments in a particular market or region no longer apply, and the payments market could learn much by better understanding what is occurring at a global level. For vendors and payment providers there is major opportunity for growth in the global payments market. Central to taking advantage of this will be maintaining an understanding of the nuances of each individual market and addressing specific end-user pain points, while learning from the experiences of and developments in other regions. Developer-friendly APIs and easy integration are critical The API-fication of payments is at an early stage, but will become increasingly critical over the longer term. Technologies and services that can be more easily integrated with various other components within a banking or merchant environment will gain significant traction as enterprises seek greater flexibility and adaptability in their payments infrastructure. Developers are now becoming key decision-makers in payments, and catering to the specific needs of this audience will open up the potential for further innovation and payments development. This is an extract from Ovum s research report 2015 Trends to Watch in Payments by Gilles Ubaghs, published in November 2014. Gilles is a Senior Analyst in the Financial Services Technology team, focusing on global payment systems and services. He authors research reports and advises Ovum s clients on a range of payments related topics out of Ovum s Melbourne office. GILLES UBAGHS SENIOR ANALYST, PAYMENTS 08 2014 OVUM. ALL RIGHTS RESERVED. OVUM.COM

Payments Research Stream KIERAN HINES PRACTICE LEADER Use our expert industry analysis to make the right strategic decisions. 2015 sees the launch of Ovum s new Payments portfolio, which will provide detailed and databacked research into the development and adoption of technology, and the industry trends driving this change, across the global payments industry. EDEN ZOLLER PRINCIPAL ANALYST The payments market is set to reach a critical inflection point in 2015 as banks finally make their moves in the digital wallet and proximity payment space. This will be a priority area for IT investment, and vendors should be ready with standalone platforms and services to integrate seamlessly into a bank s existing channel mix. Alongside this, new payment areas, notably immediate payments, are emerging as the next wave of global payment innovation. Underpinning all of this innovation is a strong appetite for payments modernization, particularly for critical payment functions such as switching, clearing, and settlement. GLOBAL IT PRIORITIES IN PAYMENTS FOR 2015 Top priority Second priority GILLES UBAGHS SENIOR ANALYST Mobile/digital wallets Mobile proximity payments (eg NFC, QR code) Immediate retail credit transfers (eg Faster Payments) mpos RTGS/wire Contactless Domestic person-to-person (P2P) services Third priority Topics & Technologies: Analytics Big Data Bill payment Biometrics BLE Business intelligence Cloud Contactless Core renewal Cryptocurrency EMV Fraud HCE Immediate payments Interchange Location-based services Loyalty Mobile payments mpos NFC Omnichannel Online payments P2P Payment card Payment gateway Payment hub Payment processing Payment switch POS Remittance Tokenization Remittances/cross-border P2P Credit/debit/prepaid cards Bill payment Mobile check capture/deposit 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Proportion of respondents Source: Ovum 09 2014 OVUM. ALL RIGHTS RESERVED. OVUM.COM

HOW WE HELP: ASSESS THE OPPORTUNITY: ICT Spending Forecast A five-year view on growth in the payments markets, segmented by technology source and geography, and updated annually. Trends to Watch Signature reports highlighting the key predictions and trends in payments for the year ahead. Strategic Focus reports Comprehensive and business-focussed analysis of the critical issues impacting technology development and investment in the payments industry. Bringing together analysis from across Ovum s Financial Services and Telecoms practice areas, themes include mobile proximity payments, digital wallets, real-time payments, data analytics, fraud, and legacy modernization. TARGET THE MARKET: Ovum Decision Matrix These reports provide a detailed and comprehensive benchmark of the key product and service vendors in a particular area of the payments market. ICT Enterprise Insights Payments An interactive tool for assessing ICT investment patterns in payments globally with the ability to segment by geography, company type, and solution area. Innovation case studies Recommendations, best practice, and advice based on the experiences of organizations using technology to solve business challenges. COMPETE TO WIN BUSINESS: ICT Sales Prospector Helps vendor sales teams to assess industry revenue potential, and quickly create targeted lists of companies with detailed information from a database of over 850,000 organizations. NEW PRODUCTS 2015: Consumer-centric mobile payment Coverage from Ovum s Telecoms practice. Payments Software Contracts Tracker. Mobile payments tracker A new tracker for the latest developments in mobile payments. KEY THEMES FOR 2015: 1 2 3 4 Omnichannel commerce and the future of mobile payments Mobile payments are now mainstream in many areas of commerce, accounting for a growing share of online transactions. As HCE, BLE, and NFC all develop, the next stage of development will be strong growth in use at the point of sale. As the lines between physical and virtual commerce blur, this will drive real change in the wider retail payment experience. Securing payments and preventing fraud The rapid growth in online and mobile commerce creates a number of security challenges. The need to authenticate customers with minimal inconvenience, against a backdrop of anytime, anyplace expectations, and a criminal fraternity growing more sophisticated in their abilities, creates a need for constant investment and renewal of fraud prevention software and policies. Driving growth from legacy modernisation in payments This is a time of unprecedented innovation and regulatory change, and enterprises running legacy processing platforms are struggling to cope with today s demands. The need to support a growing range of services, coupled with industry-wide initiatives such as immediate payments, and the impact of regulation such as PSD2, SEPA, and the Fed s consultation paper, are leading to large-scale investments. Consumer m-commerce services, strategies and players (m-payments and m-advertising) Ovum will examine how consumer service providers can best position themselves in the complex m-commerce ecosystem that spans m-payments, advertising, retail, and financial services. PAYMENTS 10 2014 OVUM. ALL RIGHTS RESERVED. OVUM.COM

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