a.t. kearney payment strategy report

Andreas Pratz, Justin Krampe, Paul Laechelin

Frankfurt, June 2013 Financial Institutions Circle

Winning the growth challenge in payments European Payment Strategy Report

A.T. Kearney 10/05.2013/44887d/5aY4trQkkR00nknHnx 2

• Payment industry sentiment

• Payment market outlook

• Strategic challenges and choices

Agenda


European Payment Strategy Report 2013: multiple sources of insight Sources of insight

Source: A.T. Kearney

>50 expert interviews • Banks, schemes, processors,

MNOs, online challengers

• Coverage of major European markets

Payment market model • As-is based on ECB, various

industry sources

• Volume and revenue forecasts until 2020

Cards & payments benchmarking • Cost of domestic/cross-border

payments and card issuing

• Extensive European benchmarking database

>100 payments projects across EMEA over last years • Cards, ACH, e-/m-commerce

• Schemes, banks, processors, alternative providers, regulators

• Strategy, market entry, innovation, cash displacement, risk, profitability, regulatory impact, …

Payment industry sentiment


Note: Transactional growth for electronic transactions Source: Interviews, A.T. Kearney analysis

Accelerated growth not expected to translate into larger revenue pool Expert view on transactional and revenue growth in Europe until 2020

Key observations • Growth through innovation,

especially e-/m-commerce and cash displacement

• On average stable revenue pool anticipated due to price pressure from regulators and increased competition

How does a growth scenario look like? Is the revenue pool really stagnating?

Transactions expected to grow…

Revenue pool expected to…

Slower

33%

Faster 63%

4%

Similar

Decline 33%

Remain stable 40%

Return to grow 27%



Note: Alternative payment methods include payments not initiated through a bank current account and conducted for instance between mobile phones, through m- or e-wallets or via remittance providers; CEE: Central and Eastern Europe; LVP: Low-value payments Source: Interviews, A.T. Kearney analysis

Stable growth expected in “incumbent” areas – accelerating in alternative payments Question: What is your expected annual growth rate for transactions in Europe 2010-2015 and 2015-2020? (Ø response for growth rate)

2020f 2015f 2010

4%

8%

8%

16%

19%

4%

Alternative methods

Cards

ACH


What dynamics for alternative methods can be expected?

Key observations • Classical ACH set to continue

moderate growth path, higher dynamics from ACH underlying alternative methods

• Cards transactional growth fuelled by CEE and LVP

• Alternatives expected to grow strongly, from small base


Source: Interviews, A.T. Kearney analysis

Convenience across the board seen as most important “battleground”

Operational excellence (13%), scale (8%), security (8%), other (10%)

Use in many places/channels (8%), other (17%)


What battleground do you see most relevant going forward?

Which aspect of payment convenience will be most relevant?

15% Big data

E-/m-com. solutions 21%

Conven- ience 26% 48%

Quick to use (e.g. 1/2/3 clicks)

Easy to join (registration) 10%

Easy to use (intuitive checkout)

17%

Which battles to pick? What is needed on top of convenience to win in payments?

Key observations • Convenience and e-/m-com. solution

interrelated

• Operational excellence also mentioned by alternative providers

• Reach and scale important but not seen as the top priority


The mobile opportunity: Belief in NFC and in cooperation



Why is NFC not taking off in most countries yet? Key barriers to overcome? Alternatives?

Key observations • Dominance of NFC due to variety of

pilots and trials

• Some interviewees see benefits of pure internet solutions

• Cooperation will be crucial to seize the opportunity

Over internet (4%), One-time passcode via SMS (2%), Other/no opinion (19%)

Alternative providers (8%), Merchants (8%), MNOs (4%)

Which solution will be the most successful in mobile F2F environment?

By whom will it predomi-nantly be provided?

QR code scanning

(on mobile)

8%

6%

WiFi/ Bluetooth

NFC/ RFID 60%

21% Other cooperation

25%

33% Joint bank- MNO offering

Banks


E-Commerce: Wallet perceived as most convincing solution

Question: Which solution will stand best chances to win in e-commerce?

Debit card (6%), Invoice (6%), Other (13%)



How should e-com. be prioritized vs. m-com.? How to realize the full potential of wallets?

Key observations • Wallet seen as most powerful

solution in e-com. before OBeP/bank buttons

• Credit cards seen as superior mainly in typical credit card countries

• Less potential seen for traditional methods incl. invoice

OBeP 13%

Credit card 13%

Wallet 50%


15%

Reach 13%

Essentials

Cost 48%

Note: Large billers include telcos, utilities, insurers, government institutions etc. who initiate the majority of electronic transactions Source: Interviews, A.T. Kearney analysis

Large billers: Sentiment that cost still rules decision on payments Question: What factor matters most when billers choose a payment method?


Checkout convenience (6%), Value-added services (4%), Other (15%)

What can be done to grow the cake beyond payments? Why should we care about merchants?

Key observations • Biller criteria: Focus is on the

mechanics, not (yet) on consumer needs

• Online merchants seek for minimal drop-out rates and seamless consumer journey

• Only few interviewees see importance of merchants


The hopeful and the concerned

Note: Question: Who is best prepared to win in payments over the coming years? Ranking according to answers Source: Interviews, soundbites selected by A.T. Kearney

Expert view on who is best prepared to win in payments

E-commerce specialists/wallets

New bank solutions

Incumbent bank solutions

MNO solutions

Remittance providers

• “Shorter product development cycles, no regional constraints and less regulation”

• “Scale, also in F2F, key to stay competitive”

• “Enjoy trust in highly profitable niche segment” • “They will learn to innovate”

• “Incumbents can play the reach card” • “Can leverage broad customer base”

• “Cooperation essential in mobile payments” • “Different business model, many important

topics other than payments”

• “Potential for wallet or OBeP solutions” • “Banks can build on consumer trust when it

comes to payments”

1

2

3

4

5






Agenda


1.60 1.20 1.00 0.80 0.60 0.40 0.20 0.00 1.40 2.20

50

2.00 1.80

250

150

200

100

1,800

400

350

0 2.40 2.60

300

Lithuania Latvia

Italy

Ireland

Hungary

Greece

UK

Slovakia

Slovenia Spain

Sweden

Non-cash payments per capita

Romania

Card/ACH transactions

Portugal

Poland

Netherlands

Malta

Luxembourg

Germany

France

Finland

Estonia

Denmark

Czech Republic

Cyprus

Bulgaria

Belgium

Austria

Status Europe: Huge room to evolve payment system

Note: Bubble size refers to number of non-cash transactions; ACH transactions used as a synonym for credit transfer, direct debit and cheque transactions Source: European Central Bank, A.T. Kearney

ACH vs. card markets (2011)

Card markets ACH markets

Payment market outlook


Payments a growth spot in a slow environment

Note: Telecommunication CAGR refers to Western Europe Source: A.T. Kearney European Payment Market Model, building on actuals from ECB, RBR and other sources; IDC

Non-cash payments in Europe (bn transactions, CAGR in %, EU-27 2005 – 2020f)

Cash share in retail sector 82% 78% 71%

177

121

8770

2005

8%

7%

5%

2020f 2015f 2010

60%


eCommerce (2010-2015)

10%

Retail 3% Telecommunication -1%


Change of instruments – change of providers?

Electronic payments evolution (EU-27, share of transactions)

Credit transfers/ direct debits

Debit/credit cards

Cheques

Alternative payment methods

2020f

38-42%

<2% 12-20%

2015f

45-50%

43-47%

<3% 4-6%

2010

53%

40%

6% 1%

2005

55%

34%

10% 1%

40-44%

Notes: Without ATM transactions; Alternative payment methods include payments not initiated through a bank current account and conducted for instance between mobile phones, through m- or e-wallets or via remittance providers Source: A.T. Kearney European Payment Market Model, building on actuals from ECB, RBR and other sources



Landslide shift in revenue pool

6%

7%

2%

Credit transfers/ direct debits

Debit/credit cards

Alternative payment methods

2020f

~65

20-24

18-26

18-26

2015f

~50

18-22

16-22

10-16

2010

~37

16

15

6

2005

~33

14

13

6

Notes: Alternative payment methods include payments not initiated through a bank current account and conducted for instance between mobile phones, through m- or e-wallets or via remittance providers; debit/credit cards includes transactional issuing and acquiring revenues; credit transfers/direct debits include paper and electronic transactions, high-value and international transactions, and exception handling Source: A.T. Kearney European Payment Market Model, building on actuals from ECB, RBR and other sources

European payment revenue pools (€ bn, CAGR in %, EU-27 2005 – 2020f)






Agenda


Pick your battles

Source: A.T. Kearney analysis

Reach/ acceptance

Data

Security

Cash displacement

Scale

E-/m- commerce

Con- venience

Use cases

Payment battlegrounds

Strategic challenges and choices


90% current accounts/debit cards

Example Germany

~40% credit cards

~45% onl. banking

~100% mobile phones

Pick your battles


Reach/ acceptance

Data

Security

Cash displacement

Scale

E-/m- commerce

Con- venience

Use cases


Reaching many, quickly



Pick your battles


Reach/ acceptance

Data

Security

Cash displacement

Scale

E-/m- commerce

Con- venience

Use cases

Network before plain scale




Cashdisplace-

mentATM

POSUse

Pay-ment

De-posit

TrustPolicy

Pick your battles

Note: Wheel of cash starts at ATM use and includes measures to discourage cash circulation, broaden card acceptance, encourage POS use, increase electronic payments, and encourage cash deposits. This is supplemented by measures fostering (perceived) security and convenience, and general policy measures (e.g. reduce red tape, foster financial inclusion, promote e-invoices) Source: A.T. Kearney analysis

Reach/ acceptance

Data

Security

Cash displacement

Scale

E-/m- commerce

Con- venience

Use cases

Motivate and engage – market level




Pick your battles


Reach/ acceptance

Data

Security

Cash displacement

Scale

E-/m- commerce

Con- venience

Use cases

Position for “e” to win in “m”




Pick your battles


Expected value of loss

Base level

Simplified

Enhanced

-

+

Low

High

High

Low

Convenience

Reach/ acceptance

Data

Security

Cash displacement

Scale

E-/m- commerce

Con- venience

Use cases

Security: Differentiated and convenient Payment

battlegrounds



Pick your battles


Reach/ acceptance

Data

Security

Cash displacement

Scale

E-/m- commerce

Convenience

Use cases Convenience: Easy to join, use everywhere




Pick your battles


Reach/ acceptance

Data

Security

Cash displacement

Scale

E-/m- commerce

Con- venience

Use cases

Rich data before big data


€ $ £

ABCD



Pick your battles


TransitFoodApparelCultureWhiteBrownCarDigital… … ….

Reach/ acceptance

Data

Security

Cash displacement

Scale

E-/m- commerce

Con- venience

Use cases

Key to address sub-segments and capture on-top revenues




Select the winning grounds!


Reach/ acceptance

Data

Security

Cash displacement

Scale

E-/m- commerce

Con- venience

Use cases

Winning grounds



Seize the opportunity!

Source: A.T. Kearney

The burning platform

Processors • Make the most out of

SEPA migration: replatforming, routing optimization

• Transaction processing beyond payments

• From thin to rich data

Banks • Decide necessary

range of solutions (F2F/e/m)

• Define partnering to gain uptake

• Leverage core assets

Online challengers • Strive for convenience

• Address multi-channel needs/transition

• Define partnering for scale/relevance

MNOs • Embed with m-

commerce

• Get aligned with banks

• Define partnering in NFC/F2F to solve infrastructure

All

• Focus market positioning

• Pick verticals (use cases)

• Put upgraded authentication/risk management approach in place

• Put yourself in user shoes (merchants/billers, consumers, corporates)



Americas Atlanta Calgary

Chicago Dallas

Detroit Houston

Mexico City New York

San Francisco São Paulo

Toronto Washington, D.C.

Asia Pacific Bangkok Beijing

Hong Kong Jakarta

Kuala Lumpur Melbourne

Mumbai New Delhi

Seoul Shanghai

Singapore Sydney

Tokyo

Europe Amsterdam Berlin Brussels Bucharest

Budapest Copenhagen Düsseldorf Frankfurt

Helsinki Istanbul Kiev Lisbon

Ljubljana London Madrid Milan

Moscow Munich Oslo Paris

Prague Rome Stockholm Stuttgart

Vienna Warsaw Zurich

Middle East and Africa

Abu Dhabi Dubai

Johannesburg Manama

Riyadh

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a.t. kearney payment strategy report

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