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    Smart CommerceBanks battle for customers

    at the frontline of digital retail

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    Contents

    Introduction 01

    Executive summary 02

    Research methodology 04

    Research results 06

    01

    The growing threat to banks 06

    9& KeYjl;gee]j[]\]f]\ 07

    :& KeYjl;gee]j[]\]eYf\Yf\\jan]jk 10

    ;& KeYjl;gee]j[]Y\ghlagf 12

    D. The threat to banks 16

    02Banks responses 19

    A. Strategic ambitions and drivers 20:& Ghhgjlmfala]kZ]qgf\hYqe]fl 24

    ;& ;`Ydd]f_]klgkljYl]_q\]dan]jq 26

    D. Skill and capability gaps 32

    Gmjna]okYf\j][gee]f\Ylagfk gjfYf[aYdk]jna[]kafklalmlagfk +.

    Contacts 38

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    02

    Smart Commerce

    Banks battle for customers at the frontline of digital retail

    Research results

    :Yfckk]]l`]ajdgkkg j]d]nYf[]lg[mklge]jk\m]lgafl]je]\aYlagfYkl ]c]q

    l`j]Yl^jgel`]eYkkY\ghlagfg^KeYjl;gee]j[]k]jna[]k&

    J]khgf\]flkZ]da]n]l`Ylkaehda]\\a_alYdhYqe]fl$[gehd]e]fl]\Zq]fja[`]\

    e]j[`Yfl'[gfkme]j[geemfa[Ylagf$oaddZ]Yll`]`]Yjlg^KeYjl;gee]j[]Zml

    expect it also to include entirely new digital shopping services.

    KeYjl;gee]j[]\]n]dghe]flakZ]af_\jan]ffglgfdqZq[gfkme]jf]]\kZml

    YdkgZql`gk]g^e]j[`YflkYf\ZqdYj_]hjglhggdk$kge]gmlka\]g^hYqe]flk&

    Logg ]n]jqn]j]khgf\]flkZ]da]n]l`YlKeYjl;gee]j[]oaddZ]

    a mass-market phenomenon within two years.

    :Yfckj]_Yj\l`]eYafjakchgk]\lgl`]eZqKeYjl;gee]j[]Ykl`Ylg^

    customer intermediation and the decline in bank relevance to consumer

    commerce should this occur.

    :YfckYj]hdYffaf_lg\]dan]jYeZalagmkKeYjl;gee]j[]k]jna[]klg[gmfl]jl`]

    threat of intermediation.

    Egklj]khgf\]flkoYfllgZ]YKeYjl;gee]j[]kgdmlagfhjgna\]jg ^]jaf_

    integrated solutions incorporating both payments and broader purchasing

    ^Y[adalYlagfk]jna[]k]&_&$\a_alYddgqYdlq$hjgeglagfkYf\j][]ahlaf_!$Yf\

    most intend to deliver this within two years.

    Over 80% of respondents believe banks can support targeted digital merchant

    promotions using customer data in addition to their traditional payment services

    role; however, one in eight thinks that banks should stick to providing only

    hYqe]flYf\fYf[]k]jna[]kafKeYjl;gee]j[]&

    HYjla[ahYflka\]fla]\l`j]]eYaf[ Ydd]f_]klg\]dan]jqg KeYjl;gee]j[]

    kljYl]_a]k2gn]j[geaf_[gfk]jnYlan]afl]jfYd[mdlmj]k3k]d][laf_l`]Z]kl

    kgdmlagfo`]fl`]j]akfg[d]Yjoaff]jYf\^jYm\'\YlYk][mjalqjakckYj]Yc]q

    concern; and ensuring regulators are kept up to speed.

    Most participants also need to address capability and skills gaps notably in

    distribution, mobile app development and in social media.

    Gmjna]okYf\j][gee]f\Ylagfk^gjfYf[aYdservices institutions

    At Ernst & Young we recognize both that the intermediation fears exhibited in

    l`akklm\qYj]o]dd^gmf\]\ZmlYdkgl`YlKeYjl;gee]j[]hj]k]flkYfmfmkmYd

    ghhgjlmfalq^gjfYf[aYdk]jna[]kafklalmlagfklg_]f]jYl]j]n]fm]^jgeYhjgl

    pool to which they have had little access to date: retail sales promotion.

    O]Z]da]n]l`YlYddjekkmhhgjlaf_j]lYadhYqe]flkoaddf]]\lg\]ka_fYj]khgfk]

    tailored to their market and competitive contexts, capabilities and ambitions but,YZgn]Ydd$oal`km^[a]fl]paZadalqlgeYfY_]l`]mf[]jlYaf^mlmj]afl`ak]p[alaf_

    and fast-moving space.

    Executive summary

    76%of respondents voicedconcern that Smart;gee]j[]oadd\aklYf[]them from customers ifcustomers start to usenon-bank digital walletsinstead of a bank cardto buy things.

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    03

    Smart Commerce

    Banks battle for customers at the frontline of digital retail

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    04

    Smart Commerce

    Banks battle for customers at the frontline of digital retail

    Research methodology

    Ernst & Young conducted in-depth interviews with

    ,)k]fagj]p][mlan]kZ]lo]]f

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    Smart Commerce

    Banks battle for customers at the frontline of digital retail

    05

    Summary of interviews by industry and region

    Americas2 Europe 9kaY%HY[a[ Total

    Retail bank 6 11 2 19

    Credit card processor or scheme 1 3 0 4

    Financial services other , 7 0 11

    Financial services companies 11 21 2 34

    Fgf%fYf[aYdk]jna[]k[gehYfa]k 2 3 2 7

    Total 13 24 4 41

    1 Retail, technology and telecommunications

    2 Includes one respondent from Latin America

    To support our interviews, we provided respondents with a number of supplementary

    \]k[jahlagfkYf\\]falagfklg[dYja^qim]klagfkYf\Ya\j]khgfk]k&O`]j]j]d]nYfl$

    we have included this additional information alongside the relevant chart in the report.

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    06

    Smart Commerce

    Banks battle for customers at the frontline of digital retail

    The growing threat to banks

    Banks see their loss of relevance to customers dueto intermediation as the key threat from the massadoption of Smart Commerce services

    C]qf\af_k2

    9&KeYjl;gee]j[]\]f]\

    J]khgf\]flkZ]da]n]l`Ylkaehda]\\a_alYdhYqe]fl$[gehd]e]fl]\Zq]fja[`]\e]j[`Yfl'[gfkme]j[geemfa[Ylagf$oaddZ]Yll`]`]Yjlg^KeYjl;gee]j[]Zml

    expect it also to include entirely new digital shopping services.

    B. Smart Commerce demand and drivers

    KeYjl;gee]j[]\]n]dghe]flakZ]af_\jan]ffglgfdqZq[gfkme]jf]]\kZmlYdkg

    Zql`gk]g^e]j[`YflkYf\ZqdYj_]hjglhggdk$kge]gmlka\]g^hYqe]flk&

    C. Smart Commerce adoption

    Logg^]n]jqn]j]khgf\]flkZ]da]n]l`YlKeYjl;gee]j[]oaddZ]YeYkk%eYjc]l

    phenomenon within two years.

    D. The threat to banks

    :Yfckj]_Yj\l`]eYafjakchgk]\lgl`]eZqKeYjl;gee]j[]Ykl`Ylg^[mklge]j

    intermediation and the decline in bank relevance to consumer commerce should

    this occur.

    01

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    Smart Commerce

    Banks battle for customers at the frontline of digital retail

    07

    Section 01 The growing threat to banks

    9&KeYjl;gee]j[]\]f]\

    J]khgf\]flkZ]da]n]l`Ylkaehda]\\a_alYdhYqe]fl$

    [gehd]e]fl]\Zq]fja[`]\e]j[`Yfl'[gfkme]j

    [geemfa[Ylagf$oaddZ]Yll`]`]Yjlg^KeYjl;gee]j[]

    but expect it also to include entirely new digital

    shopping services.

    9ll`]klYjlg^gmjafl]jna]ok$o]hjgna\]\gmjafl]jna]o]]koal`YZYka[\]falagf

    g^l`]logc]qYj]Ykl`Ylo]Z]da]n][`YjY[l]jar]KeYjl;gee]j[]af[dm\af_Zgl`payment and additional services as follows:

    1. Digital payment methods that simplify and enrich the experience at POS,

    both physical and online

    ;gfkme]jkmk]\a_alYdoYdd]lkZgl gfdaf]Yf\afalaYl]\^jgeYegZad]lghYq

    for face-to-face transactions.

    HYqe]flmk]kYkaehd][gfkme]j%^ja]f\dqa\]fla[YlagfYf\n]ja[Ylagf

    method, consistent across face-to-face and remote channels.

    DgqYdlqhgaflkYj]YmlgeYla[YddqY\\]\YlHGK^gj[mklge]jkYf\ngm[`]jk'

    coupons automatically redeemed with payment.

    2. Rich communication between merchant and consumer, particularly

    leveraging the mobile channel

    L`][gfkme]j'e]j[ Yflj]dYlagfk ah ]Ylmj]kYj]_mdYj]p[`Yf_]g

    information between selected merchants and their customers on all channels.

    ;gfkme]jkj][]an]lYj_]l]\Yf\j]d]nYfl\a_alYdhjgeglagfkYf\ngm[`]jkgf

    l`]ajH;Yf\egZad]$g^l]fZYk]\gfl`]ajhjgpaealqlgYhmj[`Ykaf_ghhgjlmfalq&

    L`]egZad]h`gf]'lYZd]lakY[gfklYflk ghhaf_[gehYfagflgl`][gfkme]j

    and is also used by retailers to communicate in store to customers.

    Afl]jna]o]]kj]khgfk]kgf`goY[[mjYl]dql`ak\]k[jahlagfg^KeYjl;gee]j[]eYl[`]\

    their own views reveal much about the current standing, ambition and potential strategic

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    mf]imang[Ydoal`Yddj]khgf\]flkZ]da]naf_KeYjl;gee]j[]oadd\]n]dghafYld]Ykl

    kge]g^l`]Yj]Yk\]f]\&

    Seventy-three percent of respondents agreed with the retail future we described to a

    dYj_]]pl]fl$oal`,)Z]da]naf_l`Yll`ak\]k[jahlagfogmd\[`YjY[l]jar]l`]eYbgjalq

    of purchases.

    Nearly three-quartersof respondents agreedl`YlKeYjl;gee]j[]is coming.

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    09

    Smart Commerce

    Banks battle for customers at the frontline of digital retail

    @go]n]j$kge]hYjla[ahYflk^]dll`Ylgmj\]falagfoYklggfYjjgoYf\l`YlKeYjl

    Commerce will incorporate broader offerings than the digitization of the current

    POS experience.

    9fmeZ]jg^j]khgf\]flkYdkgklYl]\l Yll`]qZ]da]n]\KeYjl;gee]j[]oadd\]n]dghaflg

    a much broader service offering than the one outlined. In particular, respondents said

    l`]qZ]da]n]\KeYjl;gee]j[]km[[]kkoaddaf[gjhgjYl]em[`egj]l`Yf\a_alaraf_l`]

    current POS and retail experience, a step that was seen as merely a staging post en route

    lgf]o\a_alYdk`ghhaf_lggdk^gj[gfkme]jkYf\e]j[`Yflk&

    This is partly because some respondents saw digital versions of payments and promotionsYkfgl]fgm_`afl`]ek]dn]klg[`Yf_][gfkme]jZ]`Ynagjka_fa[Yfldq&9[[gj\af_lggmj

    interviews, there is little wrong, for example, with current in-store debit and credit card

    hYqe]fle][`Yfakek&J]khgf\]flk[al]\l`] Yadmj]g^]paklaf_F]Yj>a]d\;geemfa[Ylagf

    F>;!l][`fgdg_qlgY[`a]n]oa\]khj]Y\Y\ghlagfl`mk^YjYkYhgo]j^md]pYehd]g^

    consumers apathy toward incremental improvements, particularly those that fall into the

    kgdmlagfdggcaf_^gjYhjgZd]e[Yeh&

    Meanwhile, a number of targeted promotions and loyalty schemes already use mobile

    phones as a channel. However, the majority of respondents do not believe there is scope

    for a sustainable competitive advantage in mass discounting, whether digitally delivered

    or not.

    The real opportunity in Smart Commerce is in creating brand distinctiveness with a

    differentiated digital personalized experience. We see Smart Commerce as addressing

    How can I make you happy? not What can I sell you today?

    International Retailer (Europe)

    9[[gj\af_lggmjafl]jna]ok$l`]j]YdnYdm]afKeYjl;gee]j[]akdac]dqlg[ge]^jge

    new services, which will genuinely improve consumers lives and help merchants meet

    [gfkme]jkf]]\kegj]]^[a]fldqYf\[gfn]fa]fldq&EYfqg^l`]k]f]ok]jna[]kYj]Ydkg

    likely to be disruptive to existing offerings. Our respondents said these disruptive services

    are likely to bring together location tools, social networking, scanning, mobile and

    payment technologies in new ways, potentially evolving in a manner that has not yet even

    Z]]f[gfka\]j]\&Hmllaf_Yka\]\a^^]j]flna]okgf^mlmj]KeYjl;gee]j[]k]jna[]k$Ydd

    respondents recognized that the creative and insightful use of data will be at the heartof these offerings. Our interviewees also recognized that the creation and ownership of

    l`]ja_`l\YlYakdac]dqlgZ]Y[jala[Yd\a^^]j]flaYlgj^gjjekdggcaf_lghdYqYhYjlafY

    KeYjl;gee]j[]^mlmj]&

    The key part of Smart Commerce is actually not in the area of payments at all, but in the

    area of cloud integration. For merchants this may involve non-payment functionality such

    as stock control. For consumers it may involve functions such as the ability to pre-order

    and have goods waiting for you when you get to the store.

    Retail Bank (Americas)

    The real value inKeYjl;gee]j[]aklikely to come fromnew services, whichwill genuinely improve

    customers lives andhelp merchants meetconsumers needsegj]]^[a]fldqand conveniently.

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    11

    Smart Commerce

    Banks battle for customers at the frontline of digital retail

    EYfqk]]ka_fa[Yfl[gee]j[aYd\jan]jk$afhYjla[mdYj$e]j[`YflkYd]khjgeglagfk&

    E]j[`YflkYd]khjgeglagfkoYk$Zqkge]\aklYf[]$na]o]\Ykl`]c]qhjglhggd\janaf_

    KeYjl;gee]j[]\]n]dghe]fl$[al]\Zqf]Yjdq^gmjgmlg^n]afl]jna]o]]k&L`]k]

    j]khgf\]flkZ]da]n]l`Yl`]dhaf_e]j[`Yflklgk]ddegj]]^[a]fldqYf\]^^][lan]dqoadd

    ^mf\l`][gklkg^affgnYlagfZ]`af\em[`g^KeYjl;gee]j[]&

    The focus of much digital payment effort to date has, by contrast, been focused on

    helping consumers buy more conveniently. Respondents recognized that it is ultimately

    retailers and manufacturers that pay for commerce services and have the most to gain

    from digital improvements.

    Merchant sales promotions

    and loyalty schemes

    Payments revenue

    HGKfYf[]

    Manufacturer sales promotions

    18%

    76%

    47%

    21%

    :Yk]2>afYf[aYdk]jna[]kj]khgf\]flk+,!Respondents could select up to two answers

    O`a[`Yj]l`]eYafhjglhggdk\janaf_KeYjl;gee]j[]\]n]dghe]fl7

    While payments revenues were regularly mentioned by banks as a driver of Smart

    ;gee]j[]\]n]dghe]fl$l`]eYbgjalq\a\kgafY\]^]fkan][gfl]plYf\j][g_far]\l`]

    jgd]g^KeYjl;gee]j[]afhjgl][laf_]paklaf_j]n]fm]$YdZ]algf]o`]j]hja[af_ak

    already under severe pressure. A number of other respondents, typically online and digital

    companies, see the opportunity to gain share of the payments market and the criticalaehgjlYf[]g^hYqe]flklgYZjgY\]jKeYjl;gee]j[]g^ ]jaf_&Afl`akj]kh][l$k]n]jYd

    banks explicitly imagined a world where the larger digital organizations would give away

    l`]hYqe]fl]d]e]flafgj\]jlghjgegl]KeYjl;gee]j[]ljYfkY[lagfk&

    Fundamentally retailers will pay for Smart Commerce to drive their sales but manufacturers

    may also decide they can go direct to consumers and bypass retailers. There are no NEW

    hjglhggdkaf`]j]&L`]qYdj]Y\q]paklZmloaddZ]\akljaZml]\\a^ ]j]fldq&

    Global Digital Payment Services Provider (Europe)

    The large, online, digital payment platforms are looking to drive revenue out of the data

    and are even willing to give away the payment revenue to make money on the promotion.

    Retail Bank (Americas)

    There is a belief that there is a new revenue stream in payments. There isnt.

    Retail Bank (Americas)

    Examples ofSmart Commerce

    Digital couponsredeemedautomatically at the

    point of payment

    Digital statements asa vehicle for targetedoffers based on wherea consumer shops

    Delivery of location-based messaging

    to a customerssmart phonetriggered by proximityto a particular store

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    13

    Smart Commerce

    Banks battle for customers at the frontline of digital retail

    Afqgmjna]o$o`a[`Yj]l`]egklka_fa[Yflaf`aZalgjk to Smart Commerce development?

    Gmjkmjn]qhYjla[ahYflka\]fla]\YfmeZ]jg^gZklY[d]k$o`a[`eYqZ]j]klja[laf_l`]

    hY[]g^KeYjl;gee]j[]\]n]dghe]fl&L`j]]af`aZalgjko]j]e]flagf]\Zqegj]l`Yf

    half of the respondents: the slow pace of retailer adoption, the lack of added consumer

    value in digital payment solutions offered to date and the impasse brought about by

    [gfa[laf_[gee]j[aYdafl]j]klkZ]lo]]fhYjla]kYl\a^^]j]flhgaflkafl`]nYdm][`Yaf&

    While slow retailer adoption was mentioned most often, the reason cited for this by

    respondents was frequently that retailers do not believe that the solutions delivered to

    consumers so far offer enough value to encourage adoption. Respondents understood

    that retailers are unlikely to invest heavily in the infrastructure for new POS propositions

    that are not compelling to their end customers. Our respondents, though critical

    afhYjl$Y[[]hll`Ylj]f]oaf_l]jeafYdkaf%klgj][Yjja]kka_fa[Yfl[gkl^gje]j[`Yflk&

    There is also widespread recognition that the proliferation of smaller payment solutions

    is a further contributory factor to slow retailer adoption when there is limited visibility

    of likely winners.

    Will merchants want to invest if there are no lifts in sales as a result? Investment is not

    just in the technology, but in staff training and infrastructure. The question for merchants

    will be does this bring me extra business? If the consumer proposition is strong, retailers

    will adopt it as retailers follow consumer demand.

    Global Digital Payment Services Provider (Europe)

    Too many small solutions

    to gain critical mass

    Base: Financial services' answering(33)

    27%18%

    15%

    9%

    Slow pace of adoption of digitalacceptance methods by retailers

    Afkm^[a]fl[gfkme]jnYdm]to encourage adoption

    ;gfa[laf_[gee]j[aYdinterests of participants

    Improvements to existingpayment methods

    Regulatory barriersto data sharing

    Consumer resistance tosharing personal data

    58%

    55%

    52%

    Respondents could select up to three answers

    50%say that it will take uplgn]q]Yjk^gjeYkkadoption to take placeas three inhibitorsremain to be addressed.

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    15

    Smart Commerce

    Banks battle for customers at the frontline of digital retail

    ;gfa[laf_[gee]j[aYdafl]j]klkoYkl`]l`aj\g^l`]l`j]]eYbgjZYjja]jklgKeYjl

    ;gee]j[]hjg_j]kk]phj]kk]\afgmjj]k]Yj[`&Afl`]egj]\]lYad]\j]khgfk]k$kge]

    highlighted the sheer number of potential participants in the value chain and the absence

    kg^Yjg^YfqeYbgjf]ohjglhggdk&Oal`f]ohdYq]jk[geh]laf_afdgf_%]klYZdak`]\

    market with aggressive business models, the scope for commercial tensions and

    disruption is seen as particularly problematic.

    Its not clear who should take the lead in Smart Commerce. It is a bit like a gold rush.

    Everybody in the value chain wants to get a share of the riches, even the shovel maker.

    9ddjekYj]j]Y[`af_ gjegj]l`Yfl`]qYj]]flald]\lgZmlmdlaeYl]dq]n]jqgf]ak

    [`Ykaf_l`]kYe]hjgl&

    Retail Bank (Europe)

    Other respondents singled out individual participant types for effectively holding Smart

    ;gee]j[]\]n]dghe]fllgjYfkgeYf\^gj\]eYf\af_o`Yll`]j]khgf\]flkgZnagmkdq

    felt was an unreasonable proportion of sales values. Mobile network operators (MNOs)

    were mentioned more than any other type of participant in this respect, with very little

    j][g_falagf^jgegl`]jhYjla[ahYflkg^YfqnYdm]l`]q[mjj]fldqZjaf_lgKeYjl;gee]j[]&

    9[[gj\af_lggmjafl]jna]ok$o`Ylhgo]jl`]EFGk`Y\`YkZ]]fka_fa[Yfldq\adml]\

    since the launch of the iPhone and the subsequent launch of rival smart phones, which

    act as platforms for third-party app development. Progress is now limited by arguments

    over the share of transaction fees due to different industry participants.

    EFGkYf\ZYfck`Yn]`]d\mh\]n]dghe]fl&>gjn]lgkapq]Yjkal`YkZ]]fl][`fa[Yddq

    easy to build the solutions but MNOs wanted 10% of payment values. There is a mismatch

    in expectations of value a commercial standoff. MNOs wouldnt give access to the

    phones and they control access to the important secure element.

    Global Credit Card Provider (Europe)

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    16

    Smart Commerce

    Banks battle for customers at the frontline of digital retail

    :Yfckj]_Yj\l`]eYafjakchgk]\lgl`]eZq

    KeYjl;gee]j[]Ykl`Ylg^[mklge]jafl]je]\aYlagf

    and the decline in bank relevance to consumer commerce

    should this occur.

    Some banks are concerned about the potential loss of direct revenue from cards and

    current account balances.

    9dgf_ka\]l`]Z]da]^afYKeYjl;gee]j[] mlmj]$ZYfckYf\[Yj\hjg[]kkgjk ]]dl`j]Yl]f]\

    by it. Most respondents indicated some concern about the direct revenue impact of their

    customers adoption of digital wallets for purchasing. The poor relative economics of

    accepting cards as a funding source makes it likely that wallet providers will strongly

    ]f[gmjY_]\aj][l mf\af_ jgeZYfcY[[gmflkl`jgm_ Yf9mlgeYl]\;d][email protected]]9;@!

    instead. This is likely to reduce card usage and revenue for bank card issuers.

    The other direct impact cited by a third of interviewees was that some consumers would

    start to maintain a balance in their digital wallets, which previously would have been

    held in a current account, thus reducing a vital source of low-cost funding previously

    considered reliable and stable.

    =n]flmYddqo]dgk]l`][mklge]jYf\Yddl`]oa\]jnYdm]l`Ylgok^jgel`]j]dYlagfk`ah

    if we dont maintain the relevance of the bank.

    Retail Bank (Europe)

    Person-to-person (P2P) payment completely wipes out interchange and card transactions

    so the options (for us) are bad, worse and worst.

    Retail Bank (Europe)

    Section 01 The growing threat to banks

    D. The threat to banks

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    18

    Smart Commerce

    Banks battle for customers at the frontline of digital retail

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    Smart Commerce

    Banks battle for customers at the frontline of digital retail

    Banks responses

    Banks are planning to deliver ambitious

    Smart Commerce services to counter the threat

    of intermediation

    C]qf\af_k

    A. Strategic ambitions and drivers

    Egklj]khgf\]flkoYfllgZ]YKeYjl;gee]j[]kgdmlagfhjgna\]jg^^]jaf_

    integrated solutions incorporating both payments and broader purchasing

    ^Y[adalYlagfk]jna[]k]&_&$\a_alYddgqYdlq$hjgeglagfkYf\j][]ahlaf_!$Yf\egkl

    intend to deliver this within two years.

    B. Opportunities beyond payment

    Over 80% of respondents believe banks can support targeted digital merchant

    promotions using customer data in addition to their traditional payment services

    role; however, one in eight thinks that banks should stick to providing only payment

    Yf\fYf[]k]jna[]kafKeYjl;gee]j[]&

    C. Challenges to strategy delivery

    HYjla[ahYflka\]fla]\l`j]]eYaf[`Ydd]f_]klg\]dan]jqg^KeYjl;gee]j[]

    strategies:

    1. Overcoming conservative internal cultures

    2. K]d][laf_l`]Z]klkgdmlagfo`]fl`]j]akfg[d]Yjoaff]jYf\^jYm\'\YlY

    security risks are a key concern

    3. Ensuring regulators are kept up to speed

    D. Skill and capability gapsMost participants also need to address capability and skills gaps most notably in

    distribution, mobile app development and in social media.

    02

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    Smart Commerce

    Banks battle for customers at the frontline of digital retail

    Egklj]khgf\]flkoYfllgZ]YKeYjl;gee]j[]

    kgdmlagfhjgna\]jg^^]jaf_afl]_jYl]\kgdmlagfk

    incorporating both payments and broader purchasing

    ^Y[adalYlagfk]jna[]k]&_&$\a_alYddgqYdlq$hjgeglagfk

    and receipting), and most intend to deliver this within

    two years.

    Which strategy option shown below is the closest match to yourSmart Commerce strategy?

    Smart Commerce solutions provider

    Smart Commerce payment provider

    Smart Commerce sales promoter

    Smart Commerce enabler

    Base: Financial services' answering (32)

    62%

    16%

    3%

    19%

    D

    C

    B

    A

    Smart Commerce solution provider

    Develop integrated Smart Commerce

    solution incorporating e.g., payment,

    loyalty, promotion and service

    Smart Commerce payment provider

    Provide your own digital payment

    solution to your customers

    Smart Commerce sales promoter

    Provide targeted marketing and

    loyalty services to your customers,

    leveraging digital channels

    Smart Commerce enabler

    Enable your customers to use digital

    payment and Smart Commercesolutions provided by others

    Limited participation

    D

    C

    B

    A

    Extensive participation

    Nearly two-thirds of respondents have ambitious aims to be a Smart Commerce

    solution provider and in short timescales.

    Section 02 Banks responses

    A. Strategic ambitions and drivers

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    Smart Commerce

    Banks battle for customers at the frontline of digital retail

    21

    afYf[aYdk]jna[]kYfko]jaf_+)!

    35%

    It has already happened 23%

    29%

    10%

    3%

    87%indicated that theirsolutions would bein market within twoyears, with a majority

    of these intending todeliver within a year.

    Nearly two-thirdsof respondents haveambitious aims to beYKeYjl;gee]j[]kgdmlagfhjgna\]jYf\in short timescales.

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    Smart Commerce

    Banks battle for customers at the frontline of digital retail

    Respondents Smart Commerce ambitions were motivated principally by enhancing

    customer relationships and payment revenue.

    The commercial drivers behind these ambitions were explored in our questions on the nature

    g^l`]KeYjl;gee]j[]ghhgjlmfalq^gjj]khgf\]flkgj_YfarYlagfk&L`]egklhghmdYj

    Yfko]jaf\a[Yl]kl`Yl`Yd^g^j]khgf\]flkk]]l`]ghhgjlmfalqafKeYjl;gee]j[]oal`af

    the defensive commercial context of retaining and improving customer relationships.

    J]khgf\]flkZgl`oal`afYf\gmlka\]g^ljY\alagfYdfYf[aYdk]jna[]kj][g_far]\ZYfck

    as possessing a key asset in customer relationships and customer data with a very broad

    view of their customers purchasing behavior. Many banks therefore see the opportunityin leveraging this data to increase customer loyalty and retain existing business revenues

    by maintaining relevance to customers through improved customer experiences and

    differentiated propositions. The customer experience examples mentioned by respondents

    arise from the view that banks could offer more to customers, particularly in the post-

    hmj[`Yk]K]jna[]klY_]g^l`][gee]j[]da^][q[d]&=pYehd]ke]flagf]\o]j]\a_alYd

    receipting and tools to help consumers understand where they are spending their money.

    O]Yj]]plj]e]dq\YlYja[`Zmlo]eYc]hggjmk]g^al&L`]ghhgjlmfalqakafegj]]^[a]fl

    and effective use of our data to provide a truly differentiated offer in terms of value to

    the customer. For example, if someone is about to spend 300 we could give them real-

    time data that would tell them whether they can afford it, or whether they could afford it

    but be in real trouble next week. We can then give customers options in terms of purchasing,

    purchasing with an advance, etc. Customers have never been less trusting of retail banks

    but never in more need of bank advice.

    Retail Bank (Europe)

    We have a fantastic advantage today if we wake up and do something. With balance sheet,

    trust, distribution and global scale, we have a great opportunity to build the future for

    digital payments.

    Global Credit Card Provider (Europe)

    Section 02 Banks responses

    A. Strategic ambitions and drivers

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    Smart Commerce

    Banks battle for customers at the frontline of digital retail

    Nearly a third of interviewees were seeking to gain or maintain payment revenues. While

    digital payment providers are certainly targeting the payment revenues of the banks and

    [Yj\af\mkljq$ZYfckl`]ek]dn]keYafdqk]]l`]hYqe]flkghhgjlmfalqafKeYjl;gee]j[]

    gflog^jgflk2jkl$eYaflYafaf_]paklaf_j]n]fm]klj]YekZq\]dan]jaf_Yegj]k]Yed]kk

    and enhanced payment solution, and second, growing the use of lower-cost and more

    k[YdYZd]KeYjl;gee]j[]hYqe]flkgdmlagfkYll`]]ph]fk]g^[Yk`&

    What do you see as the opportunities arising from Smart Commercefor organizations such as yours?

    Developing differentiatedpropositions

    Base: Financial services' answering(33)

    32%

    29%

    24%

    18%

    Retaining and expandingrelationships with customers

    Gaining/maintainingpayment revenue

    Providing supporting servicesand technology

    Delighting customers throughimproved experience

    Extending alongthe value chain

    50%

    32%

    Respondents could select up to three answers

    Nearly a third ofinterviewees wereseeking to gain ormaintain paymentrevenues.

    We have a fantasticadvantage today ifwe wake up and dosomething. Withbalance sheet, trust,distribution and globalscale, we have a great

    opportunity to buildthe future for digitalhYqe]flk&

    Global Credit CardProvider (Europe)

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    Smart Commerce

    Banks battle for customers at the frontline of digital retail

    Over 80% of respondents believe banks can support

    targeted digital merchant promotions using customer

    data in addition to their traditional payment services role;

    however, one in eight thinks that banks should stick

    lghjgna\af_gfdqhYqe]flYf\fYf[]k]jna[]kaf

    KeYjl;gee]j[]&

    Beyond Purchase, which of the other three elements of theSmart Commerce value chain below can banks participate in?

    The Smart Commerce value chain

    Promote

    Manage customer data

    Design promotions

    af[&j]oYj\'dgqYdlq

    programs)

    Target promotions

    ;geemfa[Yl]promotions

    Redeem promotions

    Service

    Measure satisfaction

    Provide support

    Offer additional

    services

    Purchase

    ;Yhlmj]gj\]j

    Provide payment

    Hjgna\]fYf[]

    Select

    Supply product

    information

    Display product

    Product trial

    and testing

    n/a83% 33% 47%

    :Yk]2>afYf[aYdk]jna[]kYfko]jaf_+(!Respondents could select up to three answers

    Eighty-three percent of respondents saw potential for banks to go beyond the

    Hmj[`Yk]klY_]g^l`]nYdm][`Yaflgg^^]jk]jna[]kafKeYjl;gee]j[]hjgeglagf$

    Ydl`gm_`j]dYlan]dq^]oY[lmYddq]phj]kk]\l`akYkYkh][a[ghhgjlmfalq^gjl`]ek]dn]k&

    Once again, our interviewees recognized the powerful and valuable data that banks

    `Yn]Yll`]ajf_]jlahk&

    Section 02 Banks responses

    B. Opportunities beyond payment

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    Smart Commerce

    Banks battle for customers at the frontline of digital retail

    however, one in eightthinks that banks shouldstick to providing onlyhYqe]flYf\fYf[]services.

    The detail of responses from interviewees focused on developing end-to-end solutions

    shows the desire to control customer data and the opportunities respondents believe may

    exist to attract new customers and generate new revenue through differentiated offerings.

    A new wave of promotions that use consumers bank payment transaction data in a more

    intelligent and targeted manner was seen by many respondents as the most likely route

    for banks to follow. This compares to the limited and imprecise nature of much existing

    digital promotion, which is based on location or the purchasing history of a customer with

    just a single merchant.

    We plan to be very active. We want payment mechanisms put into digital wallet alongwith credit cards, promotions that create loyalty, rewards strategies that compound

    savings giving customers meaningful discounts on some purchases.

    Retail Bank (Americas)

    Banks have an opportunity in the way they operate to use data to drive promotions.

    However, they will need alliances to add value in other elements of the value chain.

    Digital Payment Services Provider (Europe)

    Assuming the current account remains the key processing hub then banks have a role to

    play in promotion, but they need to move quickly to maintain their relevance.

    Technology (Europe)

    However, this was not a universally held view, with some respondents expressing concern

    about banks participating in areas in which they have no experience and which may end

    up damaging their reputation and brand. Others pointed out that while banks may want

    to participate in all areas of the value chain, they doubted banks had the skill sets

    f][]kkYjqlgY[`a]n]l`akdg^lqYeZalagfoal`dalld]lgY\\afl`]Hjgegl]Yf\K]d][l

    k][lagfkg^l`]nYdm][`Yafaf[gehYjakgflgkh][aYdaklk&;j]\aZadalqaff]oYj]YkoYkYdkg

    seen as an issue for banks to overcome when participating outside of the payments

    sphere. In all, 12% of respondents suggested that banks should remain solely in the

    Hmj[`Yk]klY_]g^l`]nYdm][`Yaf&

    Banks are not the organizations to help consumers select and choose which productsto buy.

    Retail Bank (Americas)

    More than

    80%of respondents believe

    banks can supporttargeted digitalmerchant promotions

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    Smart Commerce

    Banks battle for customers at the frontline of digital retail

    HYjla[ahYflka\]fla]\l`j]]eYaf[`Ydd]f_]klg\]dan]jq

    g^KeYjl;gee]j[]kljYl]_a]k2

    1. Overcoming conservative internal cultures

    2. Selecting the best solution when there is no clear winner and fraud/data security

    risks are a key concern

    3. Ensuring regulators are kept up-to-speed

    Most banks need to overcome a conservative culture, which nearly two-thirds say does

    not support rapid innovation and change and nearly one-third feels is concerned about

    the cannibalization of other services.

    What are the key challenges you face in delivering yourSmart Commerce strategy?

    For banks and credit card processors (and even one or two of the digital payment providers)

    l`]\a^[mdlqg^[j]Ylaf_Y[mdlmj]kmhhgjlan]lgjYha\affgnYlagfYf\\]n]dghe]flakk]]f

    ZqeYfq.*!YkYc]q[gfkljYaflgfKeYjl;gee]j[]hjg_j]kk&Oal`l`]Zmj\]fg^

    legacy systems, are many banks even capable of the overhaul necessary to deliver the more

    accelerated new product development that consumers now demand? Our respondents

    [gf[]\]Yegj]]flj]hj]f]mjaYd[mdlmj]j]hj]k]flkYka_fa[Yfl[`Yf_]afYhhjgY[`^gj

    organizations better known for robust and lengthy testing processes, and for building

    bespoke in-house technology rather than buying bolt-on solutions. This conservative culture

    Ydkgf\kYfgl`]j][`gafl`]*1g^j]khgf\]flk^gjo`ge[gf[]jfYZgml[YffaZYdarYlagf

    of existing banking payment products is seen as another potential roadblock.

    Designing from the perspectiveof the merchant and consumer

    Base: Financial services' respondents (34)

    32%

    32%

    29%

    24%

    Creating a culture of rapidinnovation and development

    K]d][laf_kgdmlagfkoal ]fgm_ ]paZadalqlgmaintain technical and customer relevance

    Gaining the internal share of voice and

    afn]kle]fl gjl ]ghhgjlmfalqafl ][gfl]plg gl ]jeYbgjaf\mkljq[`Ydd]f_]k Y[]\

    9[[]hlaf_l Ylf]ok]jna[]keYq[YffaZYdar][mjj]flk]jna[]k

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    Smart Commerce

    Banks battle for customers at the frontline of digital retail

    What are the key operational risks that Smart Commerce providerswill have to manage in order to succeed?

    L`]c]qgh]jYlagfYdjakcl`YlKeYjl;gee]j[]kgdmlagfhjgna\]jk`Yn]lgeYfY_]

    regards the security of customer data in an environment where new devices and

    participants will become part of the commerce ecosystem. Two-thirds mentioned fraud

    YkYc]qgh]jYlagfYd[gf[]jf$-1\YlYk][mjalqYf\+0egZad]Yf\\a_alYdl][`fgdg_q

    security the top three responses to this question.

    O`ad]eYfqfYf[aYdk]jna[]khjgna\]jk`Yn]jgZmkld]_Y[qkqkl]ekYf\hjg[]kk]k

    to help prevent and manage fraud risk, our respondents expressed concerns that thehjgda^]jYlagfg^kgdmlagfkgff]oYf\dYj_]dqmfl]kl]\hdYl^gjeke]YfkKeYjl;gee]j[]

    is vulnerable to fraud.

    According to our survey, these concerns are compounded by the potential scale and

    \]hl`g^[mklge]j\YlYl`YlYj]dac]dqlgZ]afngdn]\afbgaf]\%mhKeYjl;gee]j[]

    solutions and by the sheer number of parties likely to be involved in a single customer

    purchase journey.

    9fmeZ]jg^fYf[aYdk]jna[]kj]khgf\]flkYdkg]phj]kk]\[gf[]jfkl`Ylf]okgdmlagfk

    providers are operating with less stringent risk models that will put the entire Smart

    ;gee]j[]afalaYlan]ZY[cq]Yjka^YeYbgjk][mjalqgj^jYm\Zj]Y[`g[[mjk&L`]j]o]j]

    differing views expressed about whether banks would ultimately suffer reputational

    damage in the event of a security breach outside of their control.

    Mobile/digital security risks

    Customer permissions risks

    Payment process risks

    Brand-contamination risks

    Base: Financial services' respondents (34)

    38%

    Data security risks 59%

    Fraud risks 68%

    32%

    26%

    24%

    Respondents could select up to three answers

    Section 02 Banks responses

    C. Challenges to strategy delivery

    Security and fraud arethe biggest issues.Data is just not goingto be secure thingsare not going to be

    private and theresnot much you cando about it. In thatcontext customerpermissions maywell end up becomingn]jqka_fa[Yfl&

    Retail Bank

    (Europe)

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    Smart Commerce

    Banks battle for customers at the frontline of digital retail

    Section 02 Banks responses

    C. Challenges to strategy delivery

    Historically we have talked to ourselves when developing, rather than looking at the

    merchant and consumer. There has also been a tendency to focus on protecting the

    revenues we have. Looking forward, we have to decide who we are designing for is it a

    52-year-old, or his 20-year-old daughter?

    Card Processor (Americas)

    We want to design solutions from the perspective of the merchant and consumer

    but often get caught up in internal way of thinking.

    Retail Bank (Americas)

    9[[gj\af_lggmjj]khgf\]flk$l`]dY[cg^nakaZadalqYklgl`]Z]klYhhjgY[ eYc]k

    kljYl]_a[hdYffaf_\a^[mdl$mf\]jhaffaf_l`]aehgjlYf[]g^j]lYafaf_]paZadalq&

    One in four agreed that they still do not have a clear M&A strategy to support their

    KeYjl;gee]j[]YeZalagfk&O`ad]Zmqaf_f]ol][`fgdg_qoYk^Yngj]\ZqgfdqY^]o

    respondents, many of those that did believe acquisitions or commercial partnerships

    `Y\Yjgd]lghdYqafddaf_kcaddk]l_Yhkj][g_far]alYkYoYqg^^YklljY[caf_l`]aj

    KeYjl;gee]j[]kljYl]_q&

    In contrast, some respondents saw acquisitions as a high-risk strategy, though it was

    unclear from responses whether that view held consistently across hardware and software,

    Y[jgkkY[imakalagfkg^Yddkar]kgjYlYddhgaflkafl`]nYdm][`Yaf&:YfckYdkg]phj]kk]\

    concerns about committing to a single technology and the importance of retaining

    l][`fgdg_q]paZadalq&L`]afl]flagflghYjlf]joal`l`aj\%hYjlql][`fgdg_qhjgna\]jk

    lgk]]o`YlogjckoYkY[geegfj]khgfk]&

    The answer is not clear today. Other banks want to be a leader in this space, but we are

    still unsure on how to address the issue. We want to be a smart follower to leverage what

    comes up and keep our options open.

    Retail Bank (Europe)

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    Smart Commerce

    Banks battle for customers at the frontline of digital retail

    Others feel they must also get regulators ready for Smart Commerce.

    In some areas, regulators are seen by respondents to be somewhat in denial at the large-

    scale adoption of new payment processes that could easily fall outside of the existing

    regulatory framework. Some banks articulated the view that the newer payment solutions

    are already operating beyond the remit of a single regulator. However, banks recognize

    the role they have to play in helping to educate regulators and in shaping regulation that

    akl^gjhmjhgk]afl`]ogjd\g^KeYjl;gee]j[]&

    Within Europe, there is some debate over the need for single, cross-border regulations

    lgj]hdY[]YhYl[`ogjcYhhjgY[`g^\a^^]jaf_fYlagfYdj]_mdYlagfkYkKeYjl;gee]j[]develops. Will a standard emerge led by a few key industry players?

    The current regulatory mindset is based on a world where the bank owns the payment

    system, but Smart Commerce changes this and regulators are not ready for this.

    Retail Bank (Americas)

    There will have to be changes to recognize that new organizations are entering

    l`]kmhhdq[`Yafl`Yl\gflll`]]paklaf_\]falagfkg^j]_mdYl]\jekZq]paklaf_

    authorities, for example, a company that maintains electronic/digital wallets; does

    alll`]\]falagfg YfYf[aYdafklalmlagfgjY\]hgkallYc]j7

    Retail Bank (Europe)

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    Smart Commerce

    Banks battle for customers at the frontline of digital retail

    Most participants also need to address gaps in skills

    and capabilities notably in distribution, mobile app

    development and in social media.

    L`]af\ana\mYdj]khgf\]flko]j]Yddafngdn]\afl`]KeYjl;gee]j[]nYdm][`YaflgY

    greater or lesser degree but had varied roles within their organizations. Even accounting

    for these differences, our bank participants expressed needs for a broad range of additional

    [YhYZadala]klg\]dan]jl`]ajafl]f\]\KeYjl;gee]j[]kljYl]_a]k&L`]eYbgjalq`a_`da_`l]\

    two or three capabilities where they believed their organization needed to add to existingresource and skill sets.

    Oal`afl`]ZjgY\[Yl]_gjqg^F]okcaddk$egZad]hjg\m[lYf\Yhhda[Ylagfkcaddko]j]Y

    particular area of need cited. Meanwhile, enhanced distribution capabilities to retailers

    Yf\Y\\alagfYdhjgeglagfkcaddk$hYjla[mdYjdqafl`]Yj]Yg^kg[aYde]\aY$o]j]a\]fla]\Zq

    `Yd gjegj]g^gmjj]khgf\]flk&Hj]\a[lYZdq$Ykegklj]khgf\]flkYj]]klYZdak`]\fYf[aYd

    k]jna[]khdYq]jk$^]o]j^]dll`Yll`]ajfYf[aYdeYfY_]e]fl[YhYZadala]kf]]\]\

    Ym_e]flYlagflgkmhhgjll`]ajKeYjl;gee]j[]kljYl]_a]k&

    Where interviewees planned to augment skills, most felt that recruitment was the preferred

    approach over training or acquisition of an established business. The change required for

    KeYjl;gee]j[]l`afcaf_oYk$^gjeYfq$lgg_j]Yllg]ph][l]paklaf_klY^^lgZ]YZd]lg

    Y\Yhlafk`gjl]fgm_`lae]k[Yd]k&:jaf_af_aff]oklY^^oYkk]]fYkY_gg\[YlYdqkl^gjl`ak[`Yf_]&:mlY[imajaf_Yo`gd]Zmkaf]kk]&_&$YegZad]kg^loYj]\]n]dghe]flZmkaf]kk

    was generally considered too much of a risk, and most wanted to manage the transition

    from using third-party support to providing this internally more gradually.

    Our decision on which route to take to address capability shortfalls depends on the

    urgency. Mostly we like to build in-house, but if its urgent and its available we shouldnt

    be afraid to buy.

    Retail Bank (Americas)

    60%of respondentshighlighted a needto bolster distributionto deliver their Smart;gee]j[]kljYl]_q&

    Section 02 Banks responses

    D. Skill and capability gaps

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    Smart Commerce

    Banks battle for customers at the frontline of digital retail

    O`a[`g^l`]n][gehd]e]flYjq[YhYZadalqlqh]kk`gofZ]dgo\g]k your organization need to deliver its Smart Commerce strategy?

    :Yk]2>afYf[aYdk]jna[]kj]khgf\]flk+,!

    Multiple-choice question whereby respondents selected all the categories that applied to them.

    New technology resources

    For example:

    Handsets

    Mobile network

    Mobile software

    Applications

    EgZad]'\a_alYdjakceYfY_]e]fl

    technology

    Data warehouse and analysis

    F]ofYf[aYdeYfY_]e]fl[YhYZadala]k

    For example:

    ;mklge]ja\]fla[YlagfYf\n]ja[Ylagf

    9ml`gjarYlagf'k]lld]e]fl

    ;j]\alYf\^jYm\jakcYkk]kke]fl

    Funding

    Payment

    Deposit taking

    New distribution resources

    For example:

    Mobile customer bases

    Retailer relationships

    Payment acceptance capability

    (POS and remote)

    ;gfkme]j'j]lYad]jZjYf\k

    New skills and capabilities

    For example:

    E9'hYjlf]jk`ah\]n]dghe]fl

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    Smart Commerce

    Banks battle for customers at the frontline of digital retail

    :gl ZYfckYf\j]lYad]jk Yn]o]dd%]klYZdak`]\\akljaZmlagfklj]f_l`k$q]l.(g^j]khgf\]flk

    `a_`da_`l]\Yf]]\lgZgdkl]j\akljaZmlagflg\]dan]jl`]ajKeYjl;gee]j[]kljYl]_q&

    Partnership was seen as the preferred route by banks seeking new distribution, focused

    as they are on enabling merchants to accept their payment and other solutions. Such

    partnership may take the form of a straightforward commercial arrangement to access

    a retail client base through e.g., a promotions management company rather than a

    more complex partnership or joint venture, which might be valuable if joint development

    were required.

    F]Yjdqlog%l`aj\kg^gmjj]khgf\]flkYdkga\]fla]\Yf]]\^gjf]ol][`fgdg_qkhYffaf_

    wallets, payment services, data warehousing and analytics software and mobile apps for

    ZYfcaf_$h]jkgfYdfYf[]eYfY_]e]flYf\e]j[`Yflhjgeglagfkmhhgjl&9^YajfmeZ]j

    suggested that they would expect to use the technology built by third parties (e.g., the

    card schemes digital wallets) to support their strategies but some banks still plan to build

    such solutions internally. Where respondents expanded on their intentions to build new

    technologies in-house, many did so in reference to the culture of their organization and

    l`]\]kaj]lgZmad\Yf\gof]n]jql`af_&

    Segmentation, customer modeling, marketing (technology) because theyre available

    and we need them quickly and Im not too worried about building in-house.

    Retail Bank (Europe)

    Section 02 Banks responses

    D. Skill and capability gaps

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    35

    Smart Commerce

    Banks battle for customers at the frontline of digital retail

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    36

    Smart Commerce

    Banks battle for customers at the frontline of digital retail

    This is an exciting time to be involved in consumer

    commerce. However, the speed of change and uncertainty

    g^KeYjl;gee]j[]Ydkgd]Y\klgka_fa[Yfl[gf[]jfk&

    One of the most surprising insights from this study was

    the real and widespread fear articulated by established

    gj_YfarYlagfkl`YlKeYjl;gee]j[]\]n]dghe]floadd

    j]kmdlafafl]je]\aYlagf$oal`hgl]flaYddqka_fa[Yflconsequences for banks that go well beyond payment

    service revenues.

    L`]k]^]YjkYj]o]dd^gmf\]\&L`]f]ohdYq]jkafl`]KeYjl;gee]j[]nYdm][`YafYj]

    already demonstrating aggressive business models that are vastly different from the

    traditional payment and banking model. These models are based on rich data on consumer

    transactions that cross-subsidize payment services by promoting and sharing in merchant

    Yf\eYfm^Y[lmj]jhjglhggdkoal`hgl]flaYdlg^mjl`]j\akhdY[]ZYfckljY\alagfYdhdY[]af

    the purchasing experience.

    That so many of the respondents see themselves as potential providers of broad and

    afl]_jYl]\KeYjl;gee]j[]kgdmlagfkak$o]Z]da]n]$YfY[cfgod]\_e]flg^l`akl`j]YlYf\addmkljYl]k gjmk`gok]jagmkdql`akakkm]akZ]af_lYc]faffYf[aYdk]jna[]afklalmlagfk

    Y[jgkkl`]_dgZ]&Af\]]\$KeYjl;gee]j[]akgf]g^l`]^]oYj]Ykg^ka_fa[Yfl

    discretionary investment still remaining in many banks in an environment of heightened

    regulatory pressure and general cost reduction.

    L`]\a^^]jaf_hY[]g^KeYjl;gee]j[]Y\ghlagf_]g_jYh`a[Yddqakq]lYfgl`]jkljYl]_a[

    challenge facing banks and a variety of strategies and partnerships are likely to unfold

    against this backdrop. Larger banks may be able to leverage their distribution reach in

    hYjlf]jk`ahoal`keYdd]jjekl`Yl`Yn]YlljY[lan]KeYjl;gee]j[]l][`fgdg_qZmlfg

    [d]YjhYl`lgeYjc]l&E]Yfo`ad]$d]kkY__j]kkan]Yf\d]kkY_ad]fYf[aYdk]jna[]k_jgmhk

    k`gmd\k]]l`]\]^]fkan]nYdm]af\]n]dghaf_KeYjl;gee]j[]k]jna[]klgeYaflYaf

    competitive parity with payment intermediators (both new entrants and other banks).

    AfYdd[Yk]k$`go]n]j$o]Z]da]n]l`YlYemdla%kljYf\KeYjl;gee]j[]kljYl]_qakoak]o`ad]ka_fa[Yflmf[]jlYaflqafYfmeZ]jg^\ae]fkagfkj]eYafk&L`ak[gmd\e]Yfjmffaf_

    for a period with parallel or competing solutions.

    LgeYaflYafj]d]nYf[]lgl`]aj[mklge]jk$ZYfckYf\hYqe]flhjgna\]jkoadd`Yn]lgf\

    oYqkg Y[[geeg\Ylaf_l`]jYha\\]n]dghe]fllae]k[Yd]k\]eYf\]\ZqKeYjl;gee]j[]

    within organizations used to a much slower pace of change. They will also need to think

    aff]ooYqkYZgml`gol`]ajKeYjl;gee]j[]k]jna[]k[YfY\\nYdm]afl`]ZjgY\]j

    context of consumers lives and merchants businesses as well as addressing the new

    fraud and data security risks they present.

    Our views and recommendations^gjfYf[aYdk]jna[]kafklalmlagfk

    :Yfck^Y[]kge]k]jagmkthreats and the riskof gradually beingdiminished to utilitystatus. However,if they make the right

    choices, banks couldf\l`]ek]dn]kenjoying a continuedand expanding role atthe forefront of theKeYjl;gee]j[]revolution.

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    Smart Commerce

    Banks battle for customers at the frontline of digital retail

    37

    For many this will involve relearning the merchant business with which many banks have

    dgkl[gff][lagf&Af\]]\$e]j[`YflkYj]l`]f]onYdm]hggd^gjKeYjl;gee]j[]Yf\Yj]

    innovating on their own account with services including payment. Larger merchants

    (particularly online but also in physical retail) are already offering proprietary payment

    services, which intermediate banks and threaten to go further. Smaller merchants will

    YdkgoYfllgmk]l`]hgo]jg^KeYjl;gee]j[]kgdmlagfkhjgna\]\Zql`aj\hYjla]klg

    enable them to punch above their weight.

    With so much in this space still to be determined, we believe that the next few years hold

    l`]hjgeak]g^Yj]Ydkl]h%[`Yf_]af[gfkme]j[gee]j[]&:Yfck Y[]kge]k]jagmkl`j]Ylk

    and the risk of gradually being diminished to utility status. However, if they make the right

    [`ga[]k$ZYfck[gmd\f\l`]ek]dn]k]fbgqaf_Y[gflafm]\Yf\]phYf\af_jgd]Yll`]

    ^gj]^jgflg^l`]KeYjl;gee]j[]j]ngdmlagf&

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