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Payments 2020: Banks
& Payments
Mohit Kant
September 2016
Objectives/Agenda
 Explore what future of commerce may look like given the current trends in mobile devices,
digital paym...
Payments Industry Outlook and Key Drivers
4
Payments – The key enabler
Payments are the relationship anchor – they enable data that can be used to identify other pr...
5
Payments industry is expected to grow 6% annually over next few years but
amid that growth, there will be a rebalancing ...
6
Macro/Socioeconomic Factors
Factors Impacting Payment Market Development
Demographics
Higher proportion of young people ...
7
Industry Factors
Factors Impacting Payment Market Development
Regulatory
Outlook
Rigorous government regulation can
incr...
8
Keeping pace with customers’ changing needs will be key to winning
Evolution of Consumer Digital Payments
We are enterin...
9
Key trends that are driving a shift in the payments landscape
Technology experts are dominating the next wave of payment...
Macro-shifts & Evolving Behaviors
11
Consumers seek frictionless payments that are convenient, personal and on demand
Digital Payments
The use of mobile int...
12
The realized economic value of IoT will go up to $11T/year by 2025 - McKinsey
Internet of things and smart-device growt...
13
Mobile proximity payments are the fastest growing segment for mobile payments
Proximity Payments
Consumers using near-f...
14
Convergence of mobile banking and social media is leading to “talk and transact” culture
Peer-to-Peer Payments
Sending ...
15
Millennials present the greatest challenge and growth potential—for banks, especially in Payments
Key Customer Segment ...
Threats: Disintermediation of Banks
17
FinTech disruptors do not carry the costs of onboarding, fraud, network infrastructure, or credit risk
The Four Scenari...
18
Disintermediation is inevitable for most banks; However, degree of disintermediation may vary
Disintermediation of Bank...
19
The digital wallet has diverse commerce-related applications extending well beyond payments
Disintermediation of Banks ...
20
Interchange revenue is being disintermediated by new merchant services solutions
Disintermediation of Banks – Merchant ...
21
P2P transfers, either domestically or internationally have been disrupted
Disintermediation of Banks – Money Transfer (...
Opportunities
23
Security and authentication measures such as Chip Authentication Program, 3D Secure,
Tokenization, and biometrics are g...
24
The rapidly changing fraud landscape and the scale of recent data breaches make EMV a
compelling long-term solution
Inc...
25
EMV and tokenization work together to create vastly greater protections against credit card fraud
Increased Focus on Se...
26
EMV implementation has forced the fraudsters to explore other channels
EMV-Fraud Moves to New Channels
• The major glob...
27
Tokenization is an effective approach that can be used to safeguard payment credentials
How does Tokenization Help Redu...
28
Which is the best placed party in the ecosystem to serve as Token Service Provider?
Tokenization – Key Questions
• U.S....
29
Likely Scenarios
Should Issuers take on the role of TSP?
Tokenization – Key Questions
• Issuers are well placed to prov...
30
Biometrics represent the potential for safer, harder to replicate authentication techniques, but they
haven't been thor...
31
3D Secure offers an extra layer of protection for cardholders and merchants. Customers are asked
to enter an additional...
Payments 2020: Banks & Payments
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Payments 2020: Banks & Payments

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This presentation explores what future of commerce may look like given the current trends in mobile devices, digital payments, social commerce and security including tokenization and new forms of identity verification

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Payments 2020: Banks & Payments

  1. 1. Payments 2020: Banks & Payments Mohit Kant September 2016
  2. 2. Objectives/Agenda  Explore what future of commerce may look like given the current trends in mobile devices, digital payments, social commerce and security including tokenization and new forms of identity verification Note: The opinions expressed in this presentation are solely those of the author and not of author’s current/former employers or any other related parties. All third party information featured in the presentation slides remain the intellectual property of their respective originators. All use of information is done under the fair use copyright principal, and author does not assert any claim of copyright for any quotation, statistic, fact, figure, data or any other content that has been sourced from the public domain. This presentation has been drafted for research and educational purposes
  3. 3. Payments Industry Outlook and Key Drivers
  4. 4. 4 Payments – The key enabler Payments are the relationship anchor – they enable data that can be used to identify other product needs Traditionally, payments have enabled banks to obtain behavioral data that they can use to inform their view on risk and identify potentially un-met product needs or cross-sell opportunities Source: Deloitte research
  5. 5. 5 Payments industry is expected to grow 6% annually over next few years but amid that growth, there will be a rebalancing of revenue sources, and disruptive forces will reshape the global payments landscape Payments Industry Outlook Disruptive mix of regulatory and consumer behavioral changes, emerging technologies and new competition brings a new set of challenges to market players Market Definition (Digital Payments) Payments industry is expected to grow 6% annually over next few years but amid that growth, there will be a rebalancing of revenue sources, and disruptive forces will reshape the global payments landscape • Online processed payment transactions • Mobile payments processed via smart devices at point- of-sale • Cross-border peer-to-peer payments • Digital consumer commerce transactions (credit cards)
  6. 6. 6 Macro/Socioeconomic Factors Factors Impacting Payment Market Development Demographics Higher proportion of young people & evolving consumer behavior often leads to faster adoption of new payment methods High proportion unbanked population leads to rapid adoption of new payment methods Unbanked Population High GDP growth attracts new market entrants and faster adoption. Also, high real-income growth foster increases in average payments values GDP & Real- Income Growth Cross-border trade growth leads to greater opportunities for high-margin payments Export-Import Balance Low Medium High Low Medium High Low Medium High Low Medium High Impact by 2020* *Impact ratings based on limited expert discussions
  7. 7. 7 Industry Factors Factors Impacting Payment Market Development Regulatory Outlook Rigorous government regulation can increase the cost of compliance, leading to lower levels on innovation Active government involvement and private market player innovation can strongly impact payments infrastructure development Infrastructure Evolving payment flows and new payment instruments can result in new market entrants and increase the likelihood of more innovation Payment Flows & Instruments After basic consumer needs are met, consumer adoption is driven by incremental value, efficiency or convenience Efficiency Level Low Medium High Low Medium High Low Medium High Low Medium High Impact by 2020* *Impact ratings based on limited expert discussions
  8. 8. 8 Keeping pace with customers’ changing needs will be key to winning Evolution of Consumer Digital Payments We are entering a new era in digital payments where we will see rapid adoption of innovative solutions such as digital wallets, tokens and use of biometrics as an authentication tool. Ubiquitous connectivity, biometrics, tokenization, cloud computing and internet of things are some of the key digital trends that will impact who customers transact and interact with payment providers Source: BCG
  9. 9. 9 Key trends that are driving a shift in the payments landscape Technology experts are dominating the next wave of payments innovations Key Trends Impacting Banks Macro-shifts & Evolving Behaviors Threats New-age customer and rapid innovations Move from online payments to offline, social and mobile payments in daily life, coupled with technology innovation is impacting the economics of payments business models Disintermediation of Banks Disruption in payments is often seen as synonymous with disintermediation. While disintermediation continues to remain a long term threat, the disintermediation effect has largely been contained OpportunitiesIncreased Focus on Security & Authentication With a string of data breaches, security and authentication are top of mind for consumer with tokenization being the top security measure that could help mitigate the authentication concerns Mobile Payments are now Mainstream Most of U.S. consumers keep their phones within reach 24/7 with mobile commerce already accounting for 30% of U.S. e- commerce; Social commerce is accelerating Ongoing Digital Revolution Digital technologies continue to evolve rapidly and reshape how people communicate and transact Blockchain Technologies Gaining Momentum The potential of blockchain technologies to transform payments processing is driving next wave of change • Innovate • Focus on cost efficiencies to protect ROE • Decide – block or participate in disruption • A strategic combination of the above options Strategic Options
  10. 10. Macro-shifts & Evolving Behaviors
  11. 11. 11 Consumers seek frictionless payments that are convenient, personal and on demand Digital Payments The use of mobile internet is growing rapidly and the evolution of smartphones is enabling new payment streams • Total Value of Global Retail Transactions is predicted to be $21 trillion by 2020 • Digital Payments projected to be 18-24% of global retail payments market by 2020 • According to Forrester, Global smartphone penetration by population is expected to exceed 50 percent by 2017 • IoT, peer-to-peer and proximity transactions to drive payments growth.
  12. 12. 12 The realized economic value of IoT will go up to $11T/year by 2025 - McKinsey Internet of things and smart-device growth Cisco estimates that the number of devices connected to the Internet will increase to 50 billion by 2020. Some potential use cases of IoT payments may be • Paying for groceries using a wrist band • Paying for gas at a gas-station using a connected car • Ordering milk from a connected fridge With rapid growth, issues such as security and data ownership will need to be addressed to realize the opportunity IoT payments • Make the IoT central to digital payments strategy • Create capabilities to incorporate new types of devices into the payments strategy • Prioritize security and privacy • Partner with manufacturers of connected devices early to create payment offerings IoT: Opportunity for Financial Institutions
  13. 13. 13 Mobile proximity payments are the fastest growing segment for mobile payments Proximity Payments Consumers using near-field communications (NFC) and other mobile proximity technology will increase to ~1 billion by 2019, according to the Ovum forecast. NFC payments will be used by ~940 million people by that time driven by: • Wider merchant support for NFC across point-of-sale (POS) acceptance infrastructure • Rapid adoption of Host Card Emulation(HCE) allows banks to offer a cloud- based solution without the need to coordinate with individual carriers, thus reducing time to market • Support of tech giants - Apple, Google, PayPal, and Samsung is also driving rapid adoption . • Assess market readiness and test new NFC use cases and partner with key players early • Take the lead in ability to use mobile as payment advisor at POS to maximize rewards, leading to higher NPS • Blend security and utility in a seamless experience delivered through NFC technology with mobile as anchor Proximity Payments – Opportunities for FIs
  14. 14. 14 Convergence of mobile banking and social media is leading to “talk and transact” culture Peer-to-Peer Payments Sending money person-to-person (P2P) has also gone from expensive to cheap or free. It is forcing many in the industry to rethink this revenue stream • New tech-entrants in P2P payments space such as Facebook and Snapchat are facilitating commerce between their users to reduce switching risk • Banks need to evaluate joining clearXchange or similar initiatives to stay competitive in P2P space and gradually implementing real-time settlement • Extend value proposition beyond payments – for example optimizing rewards and instruments • Utilize trust and security value proposition to slow revenue erosion in P2P space • Replicate successful designs and experiences offered by more agile and efficient competitors P2P Payments – Opportunities for FIs
  15. 15. 15 Millennials present the greatest challenge and growth potential—for banks, especially in Payments Key Customer Segment Profile – Millennials Millennials are more likely to consider payment disruptors. They see value in the convenience, mobile support and ease of use • Over 50% of Millennials are already using or considering payment companies like PayPal or Venmo • According to Global PayPal Survey, 34% of Millennials see credit cards as “old fashioned” • Trends mentioned above are laying the emotional and psychological foundation for broader adoption of digital and mobile payments technologies — both for online and offline transactions
  16. 16. Threats: Disintermediation of Banks
  17. 17. 17 FinTech disruptors do not carry the costs of onboarding, fraud, network infrastructure, or credit risk The Four Scenarios Payments are an attractive market for disruptors. At a macro level the global market continues to grow at a healthy margin. At a micro level, there are opportunities to deliver better customer experience through faster payment options, more convenience, or integrating payments into other experiences The launch of Apple Pay and other movements towards mobile wallets from Samsung, Google and Microsoft is accelerating disintermediation of Banks Source: Mckinsey
  18. 18. 18 Disintermediation is inevitable for most banks; However, degree of disintermediation may vary Disintermediation of Banks Disruption in payments manifests itself in the rise of three major risks: • Loss of relationships (e.g. fewer customer interactions) • Loss of relevance (e.g. back of wallet) • Loss of revenue (e.g. fewer transactions) As consumers pursue the path of least resistance in payments, solutions that blend payments into the background (such as Uber) are likely to be most successful. There is a high risk that Banks may become disengaged from consumers. Banks face a strategic choice whether to retain, recede or expand their position in the payments space through partnerships, proprietary solutions or a combination of the two
  19. 19. 19 The digital wallet has diverse commerce-related applications extending well beyond payments Disintermediation of Banks – Digital Wallets Biggest impact of digital wallets on banks so far has been on relationships - particularly branding. Staying top of wallet has become even more difficult Digital Wallets Revenue Sharing (e.g.. Apple Pay) Transaction Revenue Loss due to aggregation (e.g.. Starbucks) As long as cards remain the source inside digital wallets, banks will continue to earn revenue from those transactions Strategic Options for Financial Institutions Integrate third party wallets into mobile banking apps Partner with other mobile wallet providers Build your own Wallet
  20. 20. 20 Interchange revenue is being disintermediated by new merchant services solutions Disintermediation of Banks – Merchant Services Threat to banks in merchant services is not in payments, but in relationships with merchants Merchant Services Missed opportunities as disruptors tap on underserved merchant market Disruptors are providing technology solutions to merchants and may start tapping into lending revenue streams While competition for merchant relationships has intensified, disruptors are also helping in growing the pie. For example - Square helps issuers by increasing transaction volume Strategic Options for Financial Institutions Re-think business models – i.e. pay per use Reduce operational cost and optimize pricing Introduce value- added solutions for merchants “PayPal recently announced that it has advanced USD 1 billion to more than 60,000 entrepreneurs in the US, UK, and Australia through PayPal Working Capital, its cash advance program for small businesses”
  21. 21. 21 P2P transfers, either domestically or internationally have been disrupted Disintermediation of Banks – Money Transfer (Domestic & International) Threat to banks in money transfers is that of ceding the front end customer relationships to disruptors Money Transfer Domestically, social payment platforms such as Venmo have gained mainstream adoption(especially amongst millennials) Bypassing costly correspondent banking arrangements, disruptors are offering consumers faster, transparent and more reliable international payments at a fraction of the cost Blockchain disruption is still in its nascent stages and Banks could explore its utilization in removing inefficiencies in cross- border payments Strategic Options for Financial Institutions Partner with emerging players to reduce go-to market time Update infrastructure to reduce inefficiencies Deepen client relationships (increase switching costs)
  22. 22. Opportunities
  23. 23. 23 Security and authentication measures such as Chip Authentication Program, 3D Secure, Tokenization, and biometrics are gaining traction Increased Focus on Security & Authentication • Total card fraud loses incurred by Banks and Merchants worldwide reached USD 16.3 billion in 2014 • Card Not Present fraud is rapidly increasing • Cost of data breaches has increased steadily, with total average cost to involved payments firms increasing from USD 5.4 million to USD 5.9 million DEMAND • Advanced tech-solutions to combat fraud • Real-time transaction analytics
  24. 24. 24 The rapidly changing fraud landscape and the scale of recent data breaches make EMV a compelling long-term solution Increased Focus on Security & Authentication • Reputational impact - Combined effect of several big breaches created an environment of concern for anyone holding credit cards on file • Financial impact - Stolen credit card information has a real cost to issuers which is typically then borne by the entity that was hacked • Consumer impact - Consumers have to update billers with new card information which can be time consuming (negative impact to NPS) 28% of fraud victims abandon merchants after a security breach* Sources: Javelin Strategy & Research 2015 Identity Fraud Study
  25. 25. 25 EMV and tokenization work together to create vastly greater protections against credit card fraud Increased Focus on Security & Authentication
  26. 26. 26 EMV implementation has forced the fraudsters to explore other channels EMV-Fraud Moves to New Channels • The major global brand networks announced that starting in October 2015, fraud liability may shift to the party with least security. • An EMV chip payment transaction is more secure than a magnetic stripe transaction, resulting in stronger fraud prevention for card present transactions. • As an issuer, if your cards are not EMV enabled fraud liability will remain as it is today. • NFC and EMV are companion technologies
  27. 27. 27 Tokenization is an effective approach that can be used to safeguard payment credentials How does Tokenization Help Reduce Fraud • Tokens help prevent cross- channel fraud. Even if a token is intercepted by fraudsters, its re-use will be limited • Tokens help accelerate mobile payment deployment by • Integrating easily into existing acquiring network infrastructure • Enabling immediate card activation on mobile • Existing cards can be used with tokenization
  28. 28. 28 Which is the best placed party in the ecosystem to serve as Token Service Provider? Tokenization – Key Questions • U.S.-based issuers of early payment industry tokenization initiatives had limited deployment options, since the services only were offered by the payment networks. Now, however, many issuers want to exercise more control by bringing some or even all of the tokenization process in-house, or hosting it with a trusted third-party service provider • Only the token service provider (TSP), via access to the token vault, can see the relationship between the original credential and all of its related tokens. This means that any parties involved downstream of tokenization may find it difficult to gain an aggregated view of the single credential, due to the presence of its many seemingly unrelated tokens TSP Key Responsibilities
  29. 29. 29 Likely Scenarios Should Issuers take on the role of TSP? Tokenization – Key Questions • Issuers are well placed to provide powerful levels of token and domain level control across the entire breadth of their consumer relationship. • However, tokenization is a scalable technology that does not rely on high-scale requirements for certain interfaces. Therefore, for issuers that already outsource this activity, bringing solution in-house may not be cost-effective • Further, token requestors may be unwilling to directly connect to every single issuer, and may want to interface with national or regional aggregators for token requests and token provisioning. • Different parties may evolve as TSPs – Issuer processors, networks, other third parties Large Issuers will need multi-partner tokenization strategies across different payment brands and regions, mixing some or all elements of in-house, processor and network-level tokenization activities to deliver tokenization across all channels and geographies This is high probability of intense competition between TSPs to ensure service pricing and quality and give issuers the choice to match their individual needs for security, ownership and levels of control while also meeting national and regional requirements for security and competition By late 2016, EMVCo is expected to issue the updated version of its Tokenization Specification Technical Framework add potential new implementation considerations such as Payment Account Reference(PAR) and use of QR codes for presenting and reading tokens
  30. 30. 30 Biometrics represent the potential for safer, harder to replicate authentication techniques, but they haven't been thoroughly tested on the market Biometrics - the future of authentication? • According to a recent report by Acuity Market Intelligence, mobile biometrics is set to secure 65 percent of all mobile commerce transactions by 2020, generating $34.6 billion in annual revenue • Biometrics can make it easy to conduct "card not present" transactions and eliminate the need for a physical wallet. • Many companies are testing the use of fingerprints, voices, irises and faces to validate that you are who you say you are when making a purchase or other transaction MasterCard plans to bring "selfie pay" security checks to more than a dozen countries Samsung is looking at both fingerprint, voice and iris recognition for its Samsung Pay offering
  31. 31. 31 3D Secure offers an extra layer of protection for cardholders and merchants. Customers are asked to enter an additional password after checkout completion to “verify” they are truly the cardholder. 3D Secure – The good and the bad Pros from Merchant Standpoint • Liability shift • Chargeback protection • Interchange benefits • Increased online shopping (untested) Cons from Merchant Standpoint • Customers dislike it – extra step in checkout • Customers don’t understand it • Increased card blocking and associated costs Understand interplay between fee revenue & fraud losses Issuer Considerations Consider selective implementation Invest in customer education Stay updated on evolving trends (in-house fraud teams at Merchants e.g.. Amazon)

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