1. TO PAY OR NOT
TO PAY, THAT’S A
DIGITAL QUESTION WHITEPAPER 2015
2. THE MARCH OF HUMANITY
INTO THE INFORMATION
/ ELECTRONIC AGE IS
IRREVERSIBLE
02
3. 03030303
CONTENTS
Executive Summary 04
The Opening Scene 06
Arguments and 07
Counterarguments
How Did We Get Here? 08
Phase 5 is “the big shift” 10
Mode of Transaction: The Convenience 10
of Contactless Payments
Supporting Technology 11
Operator: The Less I Feel I Pay, 14
The Better I Feel
Substance: Money that Bypasses 18
Banks and Governments
Let’s Talk Regulation 22
Consumer Expectations: Dreaming 23
about the Future of Money?
So What Did We Learn? 26
Developing a Strategy: 27
How to Stay Relevant
Fundamentals and Priorities 32
Conclusion 33
Appendix/References 34
4. EXECUTIVE SUMMARY
We’ve clearly made the
irreversible move into the digital
age. It has already transformed
the way we shop, work and play,
which has led to rapidly changing
consumer expectations, thus
upsetting all game plans. And
banks, whose basic form and
function as facilitators of payments
has up to now been relatively
unscathed by new technologies,
are not immune. It’s early days,
but mounting evidence indicates
a growing number of consumers
no longer assume banks are
essential to purchasing
transactions. It’s time for
expansive thinking on the part
of senior managers to define and
implement creative strategies to
ensure banks remain relevant in
the payments ecosystem in coming
decades. Take nothing for granted.
Our management consulting team
at Chappuis Halder & Co (CH&Co)
has teamed up with banking
software provider Misys and
crowdsourcing platform eYeka to
bring you a glimpse of what lies
ahead for payment service
providers. The days of visiting a
bank in person may be over and
it’s likely that cash and cards will
disappear entirely as alternative
forms of purchasing power emerge
alongside digital money. At the
same time, competitors outside
the banking industry, mainly
telecommunication and technology
firms, are making steady inroads
into the payments arena. There
is no time to lose. Customer
attention is shifting
away from banks and revenue will
be quick to follow. Our goal is to
translate our findings from this
study into practical strategies that
banks can adopt or adapt to secure
market share in the digital age.
How Did We Get Here?
For the sake of simplicity, five
fundamental dimensions can be
considered when defining a simple
payment transaction: type of
transaction, mode of transaction,
supporting technology, operator
/ issuer and substance. All have
evolved in distinct phases over time,
but what caught our attention at
CH&Co and spurred this study
is that for the first time, four
dimensions are simultaneously
undergoing very rapid change,
transforming the very nature
of payments and money.
• Mode of transaction:
Consumers now expect to
conduct transactions
electronically through unwired
electronic devices, regardless
of location and proximity to
a physical bank.
• Supporting Technology:
The pace of technology — with
the rapid rise of smartphones and
data-transmission capabilities
supported by cloud computing,
near field communication,
wearable technology and
biometric authentication — is
surpassing banks’ established
modes of transaction.
• Operator/Issuer:
Market newcomers are using
their knowledge of consumer
behaviour and technological
strength to enrich the customer’s
purchasing journey by:
1. reducing friction in the
relationship between customers
and payment service providers;
2. increasing the inclusion of
customers by reaching out
to a wider audience and
reducing costs;
3. engaging customers by
offering a strong user
experience and benefits; and
4. establishing trust by signing
up validated new clients.
• Substance:
New players are slowly
establishing a system that doesn’t
rely on legal tender regulated by
banks and governments to provide
customers with purchasing power.
We refer to new forms of money,
such as cryptocurrencies and
loyalty points, as digital money.
Banks should act quickly to
redress their traditional approach
to fundamentals in the payment
ecosystem. New players are
better able to streamline payments,
predict consumer wants and needs,
and capitalise on the potential of
digital money, threatening to push
large financial institutions outside
the daily transactions perimeter.
0404
5. Dreaming about the Future
of Money
To better understand what a
digital-savvy audience thinks about
the form and function of money,
CH&Co and Misys joined forces with
crowdsourcing platform eYeka to
launch an online contest in late
2014 and asked participants:
“IF YOU HAD THE ABILITY
TO DECIDE, HOW WOULD
YOU WANT TO USE
EVERYDAY MONEY
IN THE FUTURE?”
Creativity was encouraged and
the answers (grouped into themes
below) reflect this. However, the
often unorthodox views should not
be dismissed. Rather they should
serve as a warning to banks that
they also need to be thinking
creatively about the future
of money — because their
customers already are.
• Ease is king: An easy, frictionless
payment process is necessary,
even if it’s at the expense of
consumer privacy.
• Death of physical money: Money
needs to keep up with the times.
Its function will only increase but
its form is not a constant.
• New and evolving currencies:
Currency should evolve to fit
society’s needs and allow
consumers to make the
most of every exchange.
• Role of banks: The financial
services industry is ripe
for disruption by various
technological entrants, to the
extent that banks may find they
are no longer seen as vital to the
financial ecosystem.
• Trading privacy for convenience:
Technology companies are pushing
the boundaries of what’s possible
and are seen as trusted managers
of financial services.
• Empowered customers:
Consumers are aware of their
influence and power and wish to
be acknowledged and appreciated.
We learned that consumers are
eager to move forward. Not
only have they digested recent
technological advancements in the
digital age, but they want more
— a lot more. From a single
global currency to an ethical
perspective inserted into the
essence of money itself, the
fundamentals are relevance
and zero friction.
What Can Banks Do to
Stay Relevant?
As non-banks continue to expand
their offerings in payment services,
slices of the pie can still be claimed
by financial institutions if they build
a clear ‘digital money’ strategy. All
five dimensions of money discussed
earlier — type of transaction,
mode of transaction, supporting
technology, operator/issuer and
substance — have to be
considered to ensure a successful
digital transformation. Ways
that managers can develop a
digital-capable bank include:
1. Leverage internal assets, enable
partners: Strengthen back-end
infrastructure and seek partners
with a proven ability to focus
on the client experience.
2. Build new engines for emerging
ecosystems: Start fresh.
Make investments in building,
rather than in transforming, new
payment-processing platforms.
3. Stand proud, claim back the
client relationship: Provide
more value-added services to
customers through smarter
insights into what they want,
which could require bringing
in experts.
4. Build new marketplaces, act as
facilitators: Develop fresh teams
that can break with the past
(disturbing the status quo and
potentially upsetting egos).
Fundamentals and Priorities
When it comes to day-to-day
payments, we believe banks have
to make a choice between acting as
processing entities and developing
their own ecosystem. Staying in the
middle won’t be sustainable. The
rise of new entrants who not only
possess a mindset that mimics that
of the end user (the customer)
but who also play the card of
technology faster and smarter, are
a real threat to traditional financial
institutions in the payment space.
In this context, digital should
not be seen as a chapter in the
company strategy. It is actually
the environment in which any
meaningful plans have to be
developed as it changes both
value propositions and interaction
models within the complete
ecosystem (i.e. customers, partners
and staff). More importantly, no
matter which strategies it deploys,
a bank needs strong convictions
that will serve as a compass during
turbulent times. Long story short,
winners in the payment space
will be those who take risks
and go bold.
05
6. Changes in customer behaviour and
technology are continually testing
traditional financial institutions.
The financial services industry is
already taking steps to keep up in
the digital age, but the biggest
change yet is still to come.
Consumers no longer want but
expect to have fast, easy and secure
access to banking services as an
integrated step in their customer
journey. Trying to impress clients
with a blackboard menu of
customer experience, social
connectivity and on-the-go
banking is pointless. In fact a
compelling digital offering is now
seen as a hygiene factor (referring
to Herzberg’s motivation theory).
But here’s the warning: As banks
continue to cope (painfully) with
these fundamentals they need to be
aware of the fundamental change
in the payments market to come.
Day-to-day payments have
dramatically evolved over the past
decade to a point where the use
of coins or banknotes has become
increasingly niche. In parallel, the
substance itself, currency, is
challenged by alternatives where
operators and issuers of money are
no longer restricted to traditional
players. New entities offer true
substitutes to currency and plastic
and can now bypass existing
settlement architectures.
The fact is, ownership of money is
moving away from banks and
government. Entrants from the
telecommunications and technology
sectors are absorbing the essence
of banking, money issuance and
management. The traditional
definition of money where its
management lies in the hands
of a few is becoming outdated.
To sharpen that picture even further,
imagine a world where money is
generated, spent and settled
without going through banks —
a world with no cash. Looking at
banks today it’s difficult to see
their purpose in this future.
Our conclusions might strike some
as farfetched, but recent history
reminds us that ‘black swan’ events
(referring to Nassim Nicholas Taleb
theory) are not so rare and can be
instruments of serious disruption.
This joint study, performed in
collaboration with banking
software provider Misys and
crowdsourcing platform eYeka,
evaluates this change from a
historical perspective. We will
outline the main underlying trends
that support our convictions.
We also offer insights into how
customers say they want to use
money in the future, which includes
alternative mediums of exchange.
The goal is to translate our findings
into strategies that banks can adopt
or adapt to secure market share
in the digital age. While this
paradigm is new, we believe
its impact will have a profound
impact on established players
in the financial services industry.
It is time for bold moves.
THE OPENING
SCENE
06
7. ?
?
?
The evolution of financial services is a vast subject so
we’ve set some realistic parameters for this white paper
and focus solely on payments and its ability to support
transactions. We have considered the issue on a global
scale. While wealthier countries have developed
infrastructure for financial services to meet banking
needs compared with other countries where a large
numbers of the population are still ‘unbanked’, the
ongoing changes in the provision of financial services
will have a significant impact globally. From a
customer-segment perspective, this study mainly looks
at retail clients but we believe that most of the findings
can be extrapolated to the industry as a whole.
The philosophy of this study is forward-looking: What
will happen to the bank-customer relationship in the
coming decade and will banks remain relevant in the
future financial landscape?
There is no one exact answer for this, only predictions,
however we have tried to ensure that our prediction
is an informed one.
Our methodology is as follows:
- Examining industry trends (historical, actual and future)
with a list of selected references in the appendix. Our
objective is not to overwhelm the reader with data
gathered from existing studies but to use the
information as a starting point for reflection.
- Using knowledge of financial services that CH&Co,
Misys and eYeka acquired in the areas of digital
banking and digital money, based on projects
managed worldwide.
- Assessing technology, whether it exists today or
will soon emerge, without input by Misys experts
who are conducting research and development
and delivering banking solutions across the world.
- Crowdsourcing creative ideas generated in
collaboration with eYeka to better understand what
the term money will mean to customers in the future
and how the changing concept of money and its value
will affect the way we live and consume.
- Interviewing industry experts to refine and confirm our
conclusions, including top managers in banking as well
as technology companies, mobile carriers and retailers.
Rather than predicting a definitive future, we aim to
trigger discussions surrounding our assumptions
and conclusions. If this study brings about new
considerations in the meaning of money and the
future role of banks — whether it’s in agreement or
disagreement — we shall consider the paper a success.
Our paper will expose the pressing need for banks to
further explore the digital frontier, which will become the
basis of the provision of financial services in the coming
years, and examine what strategies will allow banks to
thrive if customers are to continue to perceive them
as the definitive structure when it comes to money
management.
Readers might consider the content and conclusions
of our study controversial; however we believe a
transformation is taking place within the financial
community, which motivated us to conduct this
study and share our convictions.
ARGUMENTS AND
COUNTERARGUMENTS
07
8. H0W DID WE GET
HERE?
The payment landscape has radically changed since people first began conducting business. While entire books are
dedicated to the historical analysis of finance, for our purposes we suggest the simplified version below. Defining a
simple transaction, five fundamental dimensions are considered:
We see time (the time it takes to conduct the
transaction) as a consequence of the five dimensions
above. Depending on the stage of maturity (e.g. from
using gold to using bitcoins), payments that used to
require days or months to be processed can now be
transacted in almost real time.
These dimensions have evolved over time and combined,
characterising the financial environment in which
transactions take place.
Phase 1: The simplest form of payment — bartering
goods and services — is established.
Phase 2: Specific commodities representing the value
of goods (e.g. precious metals) are introduced.
The widely used medium is now the norm
enhancing ‘market liquidity’.
Phase 3: Governments and banks begin to issue regular
coins, banknotes and documents such as cheques.
This confirms the power of states and regulation is
introduced. Business becomes even more fluid and safe.
Phase 4: Limitations of physical money are solved and
electronic currencies are vouched for by institutions.
The globalisation of people, goods and transactions
gets under way, fostered by the age of the Internet.
Phase 5: Today convenience is a prerequisite for any
product or service offered on the market, including
money. Financial institutions and digital players can
provide advanced solutions via new platforms, such
as money-management apps and payment services.
Cheques and cash are disappearing. Not only are
payments and the user experience changing, but
also the very nature of money.
Dimension of a transaction Description Examples
Type of transaction
• The logic of executing
a transaction
• Barter
• Payment (including ledger)
Mode of transaction
• The method used to execute
a transaction
• Material exchange
(hand to hand)
• Electronic exchange
Supporting technology
• The tool that has been
developed to facilitate the
execution of a transaction
• Currency
• Debit/credit cards and
card readers
• eWallet (e.g. PayPal)
• mWallet (e.g. M-Pesa)
Operator/issuer
• The entity that facilitates the
execution of a transaction
• Banks
• Governments
Substance
• The representation of
money that is used to
execute a transaction
• Goods and commodities
• Coins and banknotes
• Electronic forms of currency
• New digital money
(e.g. Bitcoins)
Figure 1: Dimensions of a transaction
9. The combination of these two perspectives, namely the fundamental process of transactions and the distinct phases
in the evolution of transactions, explain the depth of change by highlighting its origins.
Figure 2: Changes taking place across each of the dimensions of money
The evolution of the fundamentals are linked : for example the rise of new technologies might trigger a change in
the available mode of transaction, or a change in the substance could enable new players to enter the market. But at
this stage, understanding the order isn’t relevant to our study. Rather we are tackling the larger question of why the
time is ripe for the biggest change yet in the financial services sector (Phase 5).
Our answer is this: For the first time, out of the five dimensions of money, four dimensions are transforming
simultaneously and the change is profound. Let’s review these in more detail.
Dimensions
of money
Phase 1 Phase 2 Phase 3 Phase 4 Phase 5
Type of
transaction
Barter
Payment
is made
possible
Payment Payment Payment
Mode of
transaction
Material
exchange
Material
exchange
Material
exchange
Distance
become
irrelevant with
wire transfers
Electronic and
contactless
payments
minimise the
need for heavy
infrastructure
Supporting
technology
N/A N/A
Printing (or
minting) reduce
dependency
on precious
commodities
Computers and
the Internet
end physical
constraints
eWallet and
mWallets gain
large market
share thanks to
mobile phones
and NFC/HCE
Operator
/ issuer
Individuals Individuals
Banks and
governments
are the main
operators
Banks and
governments
New operators
emerge such
as telecommu-
nications and
technology firms
Substance Goods
Precious
commodities
Coins and
banknotes
Electronic
representations
of coins and
banknotes
Digital money
09
10. O1
2009
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2,200
2,400
2,600
2,800
O2
2009
O1
2010
O2
2010
O3
2010
O4
2010
O1
2011
O2
2011
O3
2011
O4
2011
O1
2012
O2
2012
O3
2012
O4
2012
O1
2013
O2
2013
O3
2013
O4
2013
O1
2014
O2
2014
O3
2014
PHASE 5 IS
“THE BIG SHIFT”
We have already witnessed a deep transformation in the
retail financial services environment, but we believe it
has yet to reach its peak, as explained in the following
sections. We will focus on the most recent phase
(Phase 5) to better understand the underlying
trends and their impact on money.
We will look at the question : “What is happening
to money?” in the context of the four changing
fundamentals:
1. Mode of transaction
2. Supporting technology
3. Operator/issuer
4. Substance
MODE OF TRANSACTION:
THE CONVENIENCE OF
CONTACTLESS PAYMENTS
The method for the execution of transactions has
evolved dramatically over the past decade. Previously
consumers had to physically exchange goods or
artefacts, with all the related limitations. Wire transfer
through computers or credit card terminals then
became available but payments remained constrained
by unwieldy underlying infrastructure.
Today, consumers have grown accustomed to conducting
transactions electronically through unwired electronic
devices. What used to be constrained by location and
proximity has become available anytime, anywhere.
By the end of 2017, an estimated two billion people will
make their purchases through their smartphones or
tablets, up from 1.6 billion at the end of 2014. At the
start of 2015, mobile and tablets account for 32% of
visits and 22% of transactions on websites and the
average order value through mobiles is at par with
the desktop channels2.
The sharp increase in the use of smartphones
for payments can be explained by:
• More mobile phones. There are nearly seven billion
mobile subscriptions worldwide as of May 2014.
This is equivalent to 95.5% of the world population.
• More smartphones. More than a quarter of the global
population will use smartphones in 2015 3
• More bandwidth. Given the shift towards higher speed
networks (the number of 2G subscribers dropped from
90% of total subscribers in 2008 to 67% in 2013,
signifying the portion of 2G subscribers moving to
3G/4G networks), more consumers are now able
to tap into the advanced data functionalities of
their smartphones.4
10
Global Mobile Data Growth
Average monthly mobile data per user 900MB
2
Economic Times Retail, Feb 2015.Extracted from http://articles.economictimes.indiatimes.com/2015-02-01/news/58675771_1_tablets-swan-life-
style-company-jabong
3
Marketer Intelligence, Dec 2014. http://www.emarketer.com/Article/2-Billion-Consumers-Worldwide-Smartphones-by-2016/1011694
4
Juniper Research, 2014. Extracted from http://www.cnet.com/news/mobile-transaction-users-to-jump-to-2-billion-by-2017/ on 07/02/2015 at 1812hrs
11. 31%
CENTRAL
AMERICA
57%
SOUTH
AMERICA
34%
MIDDLE
EAST
85%
WEST
EUROPE
53%
EAST
EUROPE
21%
CENTRAL
EUROPE
53%
EAST
ASIA
8%
SOUTH
ASIA
48%
S.EAST
ASIA
16%
AFRICA
84%
OCEANIA38%
GLOBAL
AVERAGE:
85%
NORTH
AMERICA
CLOUD
COMPUTING
MOBILE DEVICES
WEARABLES
BIOMETRICS
Active 3G/4G Connections, Compared to Total Active
Mobile Connections (2014, Q4)
Source: “We are Social”, GSMA Intelligence Report, Q4 2014
• More time on mobile phones. The proportion of media
time spent on mobile phones rose from 13% in 2012 to
17% in 2013, representing an increase of 10 hours and
15 minutes a month.5
The playing field for companies offering digital services
— so that a customer can use a smartphone or tablet
to transmit payment information — is already very
competitive and will only become more so as the
use of smartphones continues to rise.
SUPPORTING TECHNOLOGY
Money transactions have long been aided by technology, making payments easier, faster and more convenient over
time. Now, however, the pace of technology is surpassing banks’ established modes of transaction. With the rapid
rise of smartphone computing and data-transmission capabilities — supported by cloud computing, Host Card
Emulation, Near Field Communication (NFC), wearable technology, biometric authentication and distributed
protocols/open ledger — consumers want their mobile devices to be the means by which they achieve an
even more efficient and timely payment journey.
Cloud Computing
The development of cloud computing has effected
game-changing advancements in data transmission and
storage. The centralised storage of data coupled with
increasing data transmission rates (3G to 4G) makes
current smartphones/mobile devices essential tools for
transactions and payments. Digital wallets rely on cloud
storage of credit card information for security and it is
the easy and fast access of this information that is the
basis of digital payments. Dependency on unwieldy
and costly infrastructure owned by large institutions has
dropped, lowering the entry barrier to unprecedented
levels. The rise of Fintech (start-ups developing new
solutions to address financial services) illustrates the
ability to create in couple of months a payment
intermediary that is there to succeed, or fail, fast.
Figure 3: Technology layers
12. “TECHNOLOGY IS THE ANSWER
TO USERS’ EXPECTATIONS”
Tamas Braun, Director of Global Sales and Business
Development (Digital Channels), Misys
12
13. 2013
200
400
600
800
1,000
1,200
1,400
2014 2015 2016 2017 2018
Near Field Communication
With cloud technology underpinning the evolution of the
payments system, smartphones use NFC technology for
improved user experience with transactions. NFC allows
smartphones and other electronic devices to establish
radio communication with each other by touching
them together or being in close proximity.
NFC-capable devices provide:
1) secure transactions — this happens through
data encryption
2) ease of use — no need to carry multiple cards
3) versatility — seamless transfer of data
By adding NFC technology to their smartphones and
other electronic devices, Apple was able to create an
internal payment system that improves the customer
experience within its retail realm. Google created a free
digital wallet app called Google Wallet that can be used
to make store purchases with a NFC-enabled device.
Beyond the ability to push customer experience to
new levels, NFC is a means by which to bypass
current networks owned by financial Institutions.
Device-to-device payments are now available,
making the use of cash or cards unnecessary.
Wearable technology
Smartphones are hardly the end of the road. Going
forward, mobile devices are likely to play a much larger
role in the life of their owner, as demonstrated by the
rising popularity of miniature electronic components
that can be worn by consumers. Wearable gadgets
that track information related to health have already
penetrated the medical-device and fitness markets,
with 33 million units shipped globally in 2014.
The wearables market is projected to grow at a
compound annual rate of 35% over five years, reaching
148 million units shipped annually by 2019.* Given
that wearables can provide real-time information on
transactions, locations and customers, we think it will
only be a matter of time before these gadgets
provide finance-related services.
Source : businessinsider.sg – The wearable computing market report 2014
13
World Shipments of NFC-enabled Cellular Handsets
(in Millions of Handsets Shipped)
Source: IHS Inc., Feb 2014
http://www.nfcworld.com/2014/02/12/327790/two-three-phones-come-nfc-2018/
HCE enhanced by NFC, a central innovation in payments.
Near Field Communications has made ‘contactless’
payment a reality. By allowing short-range, two-way
communication between devices and using a mobile
phone’s SIM card for identification and authentication,
NFC makes it possible for consumers to securely
transfer money from one device to another.
Host Card Emulation is a cloud-based security platform
that allows the easy adoption of contactless payments
by consumers and vendors. With HCE, customers can
transact with merchants regardless of the type of mobile
carrier service they use. Instead of needing to ‘rent’
hardware space on each carrier’s SIM card, HCE allows
NFC applications to be hosted in the cloud, making it
easier for companies to implement contactless
payment solutions.
14. BANKING
PRODUCTS
AND
SERVICES
Client
touch
point
PRODUCT
/ SERVICE
AS A
SUPPORT
Client
touch
point
Client
touch
point
Client
touch
point
Biometric Authentication
With respect to cloud and device-to-device data
transmission, consumers consider security and ease of
use of paramount importance. Biometrics, which uses
recognition software that measures human features such
as fingerprints, face, retina and hand geometry and odour
/scent, will be the future of authentication, allowing
hassle-free, data-rich transfers for seamless payment
transactions. Today, increased security means increased
inconvenience, with manual, multi-factor authentication.
Tomorrow, you’ll be able to instantly confirm you are
who you say you are.
OPERATOR: THE LESS I FEEL I PAY,
THE BETTER I FEEL
Banks and credit card companies have long dominated
the payments market, but the environment is rapidly
changing and traditional players are facing increasingly
stiff competition.
Yesterday’s payment providers merely provided processing
services as an additional and isolated event to support the
actual transaction. Today’s market newcomers promise
to enrich the customer’s purchasing journey, hiding the
basic process of payment within a satisfactory overall
experience. Consumers want intuitive payment systems
that not only offer choices in methods and recipient but
that also help them to select the most appropriate
alternative via which they can generate benefits such
as discounts or vouchers. Banks remain entrenched in
traditional payment-processing methods and are thus
lagging behind dynamic new entrants — upcoming players
that pride themselves on innovative approaches to the
user experience when making a payment.
The new leaders focus on:
I. Reducing friction in the relationship between
customers and payment service providers. In
common with Uber — a mobile app-based transport
network developed in the U.S. that revolutionised
the way people travel by creating a dependable
carpooling system — new operators focus on
providing an entirely different service where
payments are no longer at the heart of the
experience but are reduced to a simple email
summarising the service and related fees.
Il. Increasing the inclusion of customers by reaching out
to a wider audience and reducing costs. Largely used
by people in cities to send money to family and
relatives living in rural areas, mobile wallet transactions
have tripled over the past two years on the back of
cost effectiveness and ease of access.
Ill. Engaging customers by offering a strong user
experience and benefits. For example, Apple’s
digital wallet service Apple Pay provides a mutually
beneficial system. In its closed ecosystem, merchants
offer customers convenience as well as better deals
(such as discounts and loyalty points), which in turn
encourages customers to stick with the service to
make payments.
lV. Establishing trust by signing up validated new
clients. U.S. lodging-service company Airbnb
gives peace of mind with its stringent validation
procedures of clients who want to rent out their
properties as well as customers who are looking
for a place to stay. Travellers are more at ease
using Airbnb, which has translated into
increased service uptake.
Non-Banks as Payment Providers
Unlike retail banks, which are highly regulated and
conventionally focused on financial products and
services, non-banks are firms whose core business does
not typically handle payments or other global money
transactions. As an example, telecommunications firms
such as Bharti Airtel and Vodafone, retailers such as the
Future Group, and large groups like Reliance Industries
are looking to tap a market of 937 million mobile
subscribers in India. Realising this potential for revenue
growth, non-banks are quickly shifting their focus to take
advantage of their knowledge of consumer behaviour and
technological strengths. Adding payment transactions to
their core business is an organic extension, providing an
enriched customer experience. While the ability to
generate direct revenues from payments is inversely
correlated to the level of competition and regulation,
players see the chance to make profits by using
customer data to cross-sell and in targeted marketing.
The approach taken by non-banks falls outside the
normal banking perspective.
Banks are going
from products
towards client
experience
GAFA are going
from client
experience to
product/services
Figure 4: Two groups of
players with different
approaches to business
We can see the payments landscape becoming highly
competitive with new entrants crowding the field.
Non-bank service providers benefit from the increased
use of mobile in this space, with the number of
mobile-payment transactions expected to
grow about 60% a year.
15. 2010
MOBILE PAYMENT TRANSACTIONS (b) CAGR 2010 - 14F
92.3%
55.4%
0
5
10
15
20
25
30
35
2010 2010 2010 2010
Banks Non-Banks
The surge in volume of non-bank mobile transactions
shows that customers are already looking beyond the
traditional payment providers. And the mere fact that
non-bank competitors are gaining traction against
established financial institutions exposes the widening
gap in their ability to provide a seamless and convenient
payment experience, with new entrants better able to
meet market demand. This is illustrated in the U.S.
where a group of retailers have developed their
own digital payment system (see box below).
Will CurrentC Take Over from Credit-Card Processors?
The Merchant Customer Exchange (MCX) was created
by a consortium of about 70 U.S. retail companies
(including Wal-Mart, 7-Eleven and Best Buy) to
develop a merchant-owned mobile-payment system.
Called CurrentC, the system is expected to be
launched this year. The stakes are high: combined,
the partners own more than 110,000 stores nationwide
and process more than $1 trillion in payments annually.
CurrentC is a mobile wallet app that allows customers
to use their phone to make purchases within the
closed group of retailers and automatically save
money from coupons and special offers, and earn
rewards from loyalty programmes, while offering
them a simpler and safer way to pay.
Unlike Apple Pay, which uses NFC technology,
CurrentC customers punch a security code into their
phone to launch the app, and then use QR codes
— a machine-readable code consisting of black and
white squares — to complete a purchase with their
device. Payment options include chequing accounts,
store gift cards and select store debit and credit cards
registered with the digital wallet.
The merchants are not only able to make sales
transactions more convenient for their customers but
they will also be able to take credit card companies out
of the equation, eliminating the 2-3% transaction fee
charged by credit card companies for each purchase.
For now, the world’s tech giants — Google, Apple,
Facebook and Amazon (GAFA) — and other major
non-bank players are still dependent on banks and credit
card companies to process and clear payments for their
products and services. But they have given us a glimpse
of a world where traditional payment providers are no
longer essential to the value chain of commerce. As we
wait to see if MCX (see dedicated box) is successful as
a standalone payment ecosystem, it’s clear the day of
a global cashless society will come. It’s already happening
in Africa : Mobile-money service M-Pesa has proven
very successful in meeting the needs of the
unbanked population.
Eighty percent of adults in Africa do not use traditional
financial services but almost everyone has a phone. In
2007, Kenya’s largest mobile-network provider Safaricom
and Vodafone launched an initiative that allows Kenyans
to use their mobile phones to set up an account to send
and withdraw money and make payments.
Today it is used by more than 17 million people in
Kenya and has expanded to Afghanistan, India and
Eastern Europe, giving millions of people an alternative
to a physical bank.
Given the extent and pace of changes taking place in
e-commerce, banks could be pushed aside, forcing their
position in the financial ecosystem to evolve. And as the
role of banks evolves so too will the payment industry
as a whole, with the emergence of open platforms and
Application Programme Interfaces (APIs) that can
provide mix-and-match services to customers. The
ability of new entrants simply to leverage existing
payment processing capabilities could turn banks
and credit card companies, such as Visa and
MasterCard, into basic utilities.
15
16. Likely Winners in the New Digital Payments Landscape
We classify the landscape of operators according to their primary/core activity:
• Banks and credit card companies, such as MasterCard and Visa (from a customer perspective)
• Telecommunications firms/mobile carriers, such as T-Mobile in the U.S and M-Pesa in Kenya
• Technology-driven multinationals, such as Apple and Google
• Retailers, such as Starbucks and Amazon
It is interesting to see how these different players stack up in their ability to become convenient and widely
acceptable payment-service providers.
With each player adding specific value, it’s difficult to say who the big winners will be but
it will be a clear departure from the current bank-dominated environment.
Advantages Challenges
Banks
• Historical entities owning the market
• Established payments-processing
infrastructure
• Large customer base that is likely to
stick with the status quo rather than
change payment habits
• Recognised as secure and regulated
• Lack of understanding of
customer behaviour
• Provide payment services in isolation
from the overall experience
• Remain largely dependent on physical
cards (credit/debit cards)
• Lack of convenience due to
security layers
• Need to make payment disappear
behind the true client goal
(e.g. acquiring a product)
Telecoms
• Wireless networks 3G and 4G
provide large bandwidth and
data transmission capability
• Mobile phones are ubiquitous
with high penetration rate among
unbanked populations (emerging
economies) as well as entrenched
distribution networks
• Enhanced visibility during
payment transactions
• Not allowed to maintain deposits
• Consumer trust mostly based on
brand name and confidence in
product/service
• Unlikely to see financial services as a
revenue driver so may pass on
expanding niche business
• Rely on traditional telecommunication
network for connecting people
Tech
companies
• Own the device, such as NFC-capable
smartphones, that enables mobile
payments
• Able to tap into large pool of
customers and merchants
• Wide knowledge of customers that
goes beyond payment behaviours
• Enhanced visibility during payment
transactions as real-time information
is captured and provided to
customers
• Mainly the intermediary between
customers and merchants
• Face stiff competition as illustrated by
the market erosion due to new players
such as Apple Pay and Google Wallet
Retailers
• Own the end objective of the
customer (i.e. the targeted product)
• Can take advantage of cross-selling
opportunities to offer customers
better deals
• Need to partner up for volume to
achieve substantial revenue from
mobile payments
• Do not own the individual customer
experience as much as tech players
(e.g. Apple Pay)
16
Figure 5: Advantages and Challenges of competitors
17. Apple Pay Goes from Strength to Strength
In September 2014, Apple rolled out a mobile payment
and digital wallet called Apple Pay, which allows certain
Apple mobile devices to make contactless payments
at retail and online checkouts (Equipped with NFC
technology the Apple devices can communicate
wirelessly with point-of-sale systems).
More than one million credit cards were registered
on Apple Pay in the first three days of availability. It has
since become the largest contactless payments service
in the U.S., outpacing other digital providers (including
Google Wallet) that have been on the market
for years.
Points of Comparison Apple Pay Why
Security High
Encompasses multi-factor authentication
including a security Touch ID (a fingerprint
identity sensor) and tokenisation (replacing
the actual credit card number with a special
number to make payments).
Acceptance Medium
Apple is a neutral non-bank that is globally
recognised and trusted by its huge base of
users, including 800 million customers who
put their credit cards on file with the company.
At launch, Apple had more than 220,000
in-store/in-app partners and strong ties with top
U.S. banks including Citibank, Wells Fargo and
Bank of America.
Value-add
(novelty and cost)
High
No cost/fee for users.
Apple reportedly takes a 0.15% cut from each
Apple Pay transaction, which is marginal
compared with the 1.7% per transaction cut
absorbed by banks managing card transactions.
Enhancement (synergy
for convenience and
ease of use)
High
Focuses on customer experience, which is
enhanced through an integration of existing
platforms that enable payments: iTunes,
Passbook, iCloud, iSight, iBeacon and TouchID.
17
Figure 6: Apple Pay analysis
18. Characteristics Description Examples
Free from physical
constraints (portable)
• No physical representation of value is
necessary. No specific device needed
to effect transaction
• Virtual wallets
• No need of coins/banknotes
Free from geographical
constraints
• Transactions enabled across geographies
• Minimal restrictions on convertibility,
if any
• Transboarder transactions
• Loyalty points
Free from accessibility
constraints
• No necessary travel /physical effort
• No necessary ‘warm body’ intermediary
• Transactions enabled from multiple
devices/touch points
• Front end managed by the consumer
• No need to go a bank branch
• Self-service
• Cryptocurrencies
Free from delays
• Allows real-time transactions (unless
constrained by the number of
intermediaries and the current
infrastructure)
• Fast transfer of money from
one bank account
to another
SUBSTANCE: MONEY THAT BYPASSES
BANKS AND GOVERNMENTS
Although money has existed in electronic form for some
time, it has remained backed by the physical existence
of currencies issued by banks and governments. Closely
correlated with the rise of new operators, innovative
forms of money have surfaced over the past decade.
Today the emergence of cryptocurrencies and the
increasing acceptance that loyalty points can be used
as online payment for goods and services are the first
indications of the next industry shift: Banks and
governments might still be at the forefront of issuing
and managing money but other players are materialising
who are able to command sufficient trust from buyers
and sellers and have put forward compelling alternate
value propositions.
They are slowly establishing a system that does not rely
on legal tender regulated by banks and governments to
provide customers with purchasing power.
We use the term ‘digital money’ to describe new forms
of money such as cryptocurrencies and loyalty points.
Digital money exhibits the following characteristics:
• It is free from physical constraints.
• It is free from geographical constraints.
• It is free from accessibility constraints.
• It is free from delays.
The table below provides a brief description of the
characteristics of digital money and examples
of each.
18
Figure 7: Characteristics of digital money
19. $1,000
$750
$500
$250
$0
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1h 12h 1d 1w 1m 3m 1y All Jul 18, 2010 Feb 04, 2015to
Cryptocurrencies
Essential to the discussion of the current digital
money landscape is the emergence of cryptocurrencies.
Since the creation of Bitcoin in 2009 and its relative
uptake, numerous cryptocurrencies have surfaced for
trade in online markets. Today, there are more than 1,200
cryptocurrencies with a market capitalisation of nearly
US$3.6 billion. Although the price of cryptocurrencies is
still relatively volatile, over the past four years they have
increased in value, pointing towards a widespread and
growing demand for such forms of money.
Cryptocurrencies allow people to send and receive
money without using banks as intermediaries.
Their inherent qualities are appealing:
• Users can send and receive money instantly.
• Fees are reduced for processing transactions.
• They ensure greater privacy and anonymity.
• They empower the customer, who no longer has
to rely on government or banks.
In order for any form of money to become successful
(i.e. become widely used as a medium of exchange for
the buying and selling of goods and services), not only
must consumers be willing to use it, there also needs to
be merchants who are willing to accept it as a form of
payment. By that measure, Bitcoin is a success. Some
of the biggest merchants in the U.S., including Target,
Subway and Victoria’s Secret, accept bitcoins. Major
payments-service provider PayPal has partnered with
Bitcoin processors BitPay, Coinbase and GoCoin to allow
its merchants to accept the cryptocurrency for digital
goods such as online games and song downloads.
We still do not know how regulation of Bitcoin or
cryptocurrencies will be put in place or whether that
will affect their unique value compared with central
bank-regulated currencies. But putting aside the
question of whether regulation is required for any form
of money to be successful, it’s important to note that
a significant number of governments have become
interested in the digital marketplace. A few have even
acknowledged cryptocurrencies as a form of money,
including the U.S. Treasury Department, which in March
2013 recognised Bitcoin as a “decentralized convertible
virtual currency”. Regulatory acceptance would only
lend more weight to the legitimacy of cryptocurrencies.
As cryptocurrencies gain momentum and become an
increasingly accepted form of payment, we think
governments will look to administer the issuance and
pool of cryptocurrencies, so that trade and consumption
using these currencies doesn’t upset the management of
traditional currencies (in terms of inflation for example).
It took PayPal, which was founded in Palo Alto,
California, in 1998, less than a decade to become
a key player in the payments industry. PayPal
succeeded where other dot-coms failed because it
was able to solve a problem that merchants were
experiencing: Small businesses were flocking online to
sell goods (e.g. eBay) but the banks couldn’t give them
a way to accept electronic payment. The typical
acquiring industry (i.e. credit cards providers) was not
able to support small business — not from a business
Figure 8: Bitcoin Price Index
20. point of view but rather from a technological
perspective. PayPal provided the solution because it
enabled any individual to start an online business and
accept e-payments. Boosted by e-commerce, PayPal
grew to become the industry giant we know today.
Up to this point PayPal was ‘just’ another channel for
banks as customers linked their bank or their credit card
details to their PayPal account. PayPal added a layer
to manage security and risk and improve the user
experience, similar to what Apple Pay is doing with
mobile payments. In this model, banks are still part
of the payments process, providing the underlying
infrastructure while using PayPal (or Apple Pay) as
an additional channel to address the market and
therefore increase the use of their services.
We believe PayPal’s key impact on the banking industry
is not with payment itself, as banks are still required in
the processing chain, but the transfer of money. With
the borderless world of the Internet, PayPal has
created a completely separate clearing system that
allows customers to send and receive digital money
from one PayPal account to another — irrespective
of location — by mobile phone or email. This is done
instantly whereas a money-transfer agent such as
Western Union can take several days to send money
from Washington, D.C. to Singapore, for example. As
a result, banks and other traditional payment providers
have seen their combined remittance market share
drop to less than 10% in the U.S.
We expect more day-to-day transactions to be
cryptocurrency-based as the benefits are more
widely recognised. While still new, the potential
impact on banks is significant, including potentially
lower revenues, a lower average account balance
and a drop in deposits.
Bitcoin versus traditional currencies.
Bitcoin is a virtual currency (and a cryptocurrency)
but not a digital currency because it is not
regulated according to the European Central Bank
definition. And it is not a real currency according
the U.S. Department of Treasury because it lacks the
key attributes of legal tender (for reasons outlined
below). However, Bitcoin shares other attributes
of a currency: it’s scarce, divisible, portable,
durable and recognisable. Bitcoin can’t currently
replace traditional currency because:
1. It is not a dependable medium of exchange.
There are about eight million bitcoins compared
with about US$2961 billion in circulation. To
substitute the cryptocurrency for dollars would
give each bitcoin a value of US$370,125. In
addition, the maximum number of bitcoins is 21
million (due to its fundamental construction logic),
which would not be sufficient to drive economies.
2. It does not provide a unit of market value.
Because of volatile fluctuations in Bitcoin value, it
cannot be used to value assets and debts. As the
supply of bitcoins is fixed, its value can rise or fall
dramatically compared with traditional currencies,
where issuance is controlled to maintain value.
3. It lacks security. Bitcoins have no physical
representation and they could easily be
expunged in the digital world.
To its advantage, Bitcoin allows anonymity during
transactions and its management can be handled
by whoever is involved in the payment process,
ensuring democratisation of money and
transparent money flow (open ledger).
The success of Bitcoin will depend on its evolution
into a secure medium of exchange with a stable
market value.
20
21. DRUG
5.2
80 90
78
135
129
162
177
137
191
254
277
325
239
422429
422429
287
153
174
106
133
93
114
74
98
LOYALTY MEMBERSHIPS BY INDUSTRY SECTOR
MILLIONS OF MEMBERS
CAGR
PERCENT
DEPARTMENT
STORE
6.1
GAMING
14.3
GROCERY
6.6
HOTEL
8.2
HOME APPAREL
HARDLINES
20.3
AIRLINE
6.4
FINANCIAL
SERVICES
15.7
2006
2008
2010
LOYALTY AND REWARDS POINTS
Loyalty programmes were intended as a means for
companies to build brand loyalty and retain customers
through rewards. This retail strategy can be traced back
to 1793 when a U.S. merchant gave out copper tokens
that could be collected by customers and exchanged
for items in the store. Frequent flyer miles were
introduced in May 1981 when American Airlines began
the first mileage-based loyalty scheme, Advantage.
Since then, retailers across industries and geographies
have launched loyalty memberships that award
points to customers.
While loyalty points aren’t a new concept, they have
never been as closely associated with money as they
are today. Loyalty points previously represented a
low-value proposition for consumers. Members were
limited to redeeming goods and services sold by the
same merchant, resulting in relatively poor redemption
rates. Even worse — from the consumer’s perspective
— loyalty points usually came with an expiry date. As
a result it wasn’t uncommon for a member to be either
unable to accumulate enough loyalty points to redeem
the good or service of choice or to have the time to
redeem the points and enjoy the programme’s benefits.
Over time, however, loyalty and rewards programmes
have become more expansive and have the potential to
become a new form of money by providing purchasing
power to customers.
Cross-Company Redemptions
It is now possible for members of a particular merchant’s
loyalty programme to redeem the goods and services of
another merchant. Airlines and hotels have teamed up to
reward each other’s loyalty programme members, such
as the joint programme between Delta Air Lines
and Starwood Hotels and Resorts that allows select
(i.e. top tier) loyalty members to receive such additional
benefits as priority boarding or late check-out.
Loyalty Points Exchange Platforms
It’s now also possible for the loyalty points of a
particular merchant’s programme to be swapped for
those of another. For example, loyalty points gained at
a supermarket can now be exchanged to be redeemed
at a café (see the following box).
Loyalty Points as a Form of Payment
Beyond enabling customers to select rewards, new market
entrants are looking to encompass loyalty points into their
payment options. Shift, a Californian start-up, is developing
a debit card that will help consumers pay for regular goods
and services using fiat currencies, digital currencies, mobile
minutes and loyalty miles, among others. Loyalty and
rewards points can also be monetised: The Apple Pay
system allows consumers to use air miles or hotel loyalty
points in exchange for goods and services from other
merchants in the Apple Pay ecosystem. It potentially
opens up a range of ways in which people can
exchange one form of payment for another.
Points.com is a Toronto-based trading platform that offers
members access to a range of loyalty programmes, from
frequent flyer miles to hotel points to retail and credit card
rewards. Subscribers can source, earn and spend the points
of more than 50 merchants just like traditional currencies.
Through the site’s ‘loyalty wallet’ members can:
- track their mile or point balance
- exchange points between loyalty programmes
- trade with other Points.com users
- redeem points
- top up to buy extra miles/points with cash
Although the value of digital money transactions remains
a fraction of total transactions globally, the trend towards
digital is growing and an increasing number of players are
entering the space in an attempt to streamline payments
and capitalise on the market’s potential. In our view, this
threat is largely underestimated by financial institutions,
which could find themselves pushed outside the daily
transactions perimeter.
22. LET’S TALK REGULATION
The shift of payments into the
digital realm gives customers added
simplicity and mobility, but there
is a pressing need to develop
compliance and regulations for new
non-bank entrants in the payments
arena to extend the protections that
customers take for granted with
traditional financial institutions.
Today, the rules are not the
same for all the players.
Banking regulations have tightened
considerably since the 2008
financial crisis through existing
compliance frameworks such as
Know Your Customer (the process
of a business verifying the identity
of its clients) and Anti Money
Laundering (controls to detect and
report money laundering). These
due diligence exercises were
developed with traditional financial
institutions in mind however, and
are not designed to keep up with
the entry of non-bank companies
(such as telcos and tech firms)
into the financial services sector.
On one hand, digital players still
navigate with a lighter compliance
burden, allowing them full adoption
of new technologies (thanks to less
stringent selection criteria) and
a faster and cheaper time to
market. As a result, the difference
in the cost of doing business
creates a bias in the market towards
non-banks. Faster and cheaper
might be seen as an advantage
from a customer perspective,
but it would mean discounting
financial security.
On the other hand, unclear
applicable regulation coupled with
extensive and costly authorisation
procedures (building the first cases)
forces new entrants to adopt a do
it first approach, leaving regulators
to react. This not only creates
confusion on the market among
professionals but also among
customers, impeding the mid-term
stability of the ecosystem.
In this context, the debate around
restructuring regulations for
financial service providers is just
starting. Considering the total
market value, in our view existing
regulations will be adapted and
better aligned to non-bank entrants
sooner rather than later.
Illustrating this trend, the British
government has made clear its
intention to apply anti-money
laundering regulation to digital
currency exchanges. The new
regulation would support innovation
and aim to prevent criminal use
of digital currencies. With an
additional £10 million allocated in
the 2015 budget, the government
said it would work to develop a set
of standards to protect consumers.
We see three major factors in a
stable framework of regulations
for new operators:
1. The rules. A modular (layered
and customisable) approach is
required by relevant governing
bodies to oversee payments
services and digital monies that
have a similar mission to central
banks with regulated currencies.
2. The players. All non-bank
companies providing any sort
of financial service should be
required to implement and
follow standard compliance
rules. Today, compliance for
financial services is largely
restricted to banks and insurance
companies. However, with the
increasing number of
non-finance operators moving
into the payments business,
the systems in place must be
extended to ensure new
operators meet legal obligations.
3. The payments ecosystem.
Payment providers who host
small and medium-size firms or
larger merchants will have to
make sure their clients also
comply with relevant rules
and regulations.
There is still a long way to go before
market practice and applicable
regulation reaches maturity. Until
then, the current regulations neither
afford banks the opportunity to be
nimble in the digital marketplace
nor shield them from competitors
who are. As much as customers
recognise the importance of
security and protection, they enjoy
the enhanced experience provided
by non-bank players and will
probably only react when
a breach has occurred.
22
23. Russian Federation /// 4
France /// 4
Philippines /// 4
Singapore /// 3
United States of America /// 3
China /// 2
Norway /// 1
Argentina /// 1
Kazakhstan /// 1
Australia /// 1
Brazil /// 1
Italy /// 1
Ukraine /// 5
Indonesia /// 8
CONSUMER
EXPECTATIONS:
DREAMING ABOUT
THE FUTURE OF MONEY?
Banks have hardly been standing still in the digital age.
Today our banks provide us with a multitude of options
that make money management tactile, real-time and
effortless. But as we have already established, other
symbiotic platforms are quickly emerging that
empower the consumer to explore an alternative to
conventional money transactions. To understand what the
money might mean to tomorrow’s consumers, we took
a creative journey. CHCo and Misys joined forces with a
leading crowdsourcing platform eYeka to set up an online
contest in late 2014 to better understand what consumers
thought money should be like and what it should allow
them to do in the future. Creativity was encouraged.
Some of the key themes are not new; however we think
the unconstrained convergence of customers’ views
crystallises these trends.
The Brief:
Money is essential in our life. We want it to be easily accessible. With Apple
Pay and Google Wallet, Bitcoin and social currency, digital technology provides
quicker and better access to money than ever before. But our relationship with
money is also affected by other solutions. Air miles are now playing a
significant role in the way we pay for travel, and are becoming a new form
of currency. Social sharing models are disrupting and improving traditional
structures (Airbnb, Uber, etc.). The world is changing and only the
user-friendly and innovative models will last.
The brief is meant to inspire a global Creative Labs approach to the future of
money. They want to hear from you and therefore your opinion matters. What is
your current experience and what do you think you will want to use tomorrow?
From transactions and payments (PayPal), to loaning, saving, trading and
investing (e.g. a social investment platform), we want to know which options
you want to survive in the future and what you want in your life. We also want
your thoughts on which new technologies should be implemented, whether
currently existing or completely original. You decide which device, platform
and currency you want. This brief is all about your wishful thinking — so we
want you to put yourself in the shoes of a finance superpower. If you had the
ability to decide, how would you want to use everyday money in the future
and what would you do?
Be creative and whacky and send us your vision. So let’s get started.
Time is money!
49 Participants
from 24 countries
Figure 9: Participation to the
eYeka survey
24. THEME 1: EASE IS KING
An easy, frictionless payment process is necessary, even
if it’s at the expense of consumer privacy (a willingness
to share personal data with merchants).
Respondents shared concepts they believed would allow
greater ease in handling money, including;
• a solar-powered USB bracelet that includes account
information such as credit card details, frequent
flyer miles and promotion codes
• a digital glove that allows payment with a handshake
• a chip inserted in the finger that allowed the consumer
to tap and pay
These concepts highlight the importance that consumers
attach to effective use of technology to make payments/
handling money easier in the future. They assume money
and related transactions will be digital and don’t consider
privacy a major issue, believing continued advancements
in technology will ensure secure transactions. As such,
the respondents indicated they would be willing to allow
companies to access to their data — therefore allowing
a frictionless journey — in exchange for better service
or coupons and discounts.
“I believe everything that comes ahead will have
to be able to simplify people’s lives... Nowadays
we’re living a fast life, where spending time on
unnecessary things is not an option”
- Divina, Philippines
THEME 2: DEATH OF PHYSICAL MONEY
Money needs to keep up with the times. Its function will
only increase but its form is not a constant and the
physical nature of money might very well be
moving towards extinction.
“In the future cash and plastic cards will no longer
be in use. In the future to make a purchase you
will need absolutely nothing.” - Equant, Russia
While the function of money will remain essential to
commerce, most respondents agree the three Cs —
cash, currency and cards — will disappear. Why carry
cash if it can be lost or stolen? Why possess a currency
that becomes worthless due to a fluctuation in value?
Why have cards that can be stolen or used in unauthorised
transactions? Consumers of tomorrow expect the
purchasing process will be devoid of such issues.
THEME 3: NEW EVOLVING CURRENCIES
Currency should evolve to fit society’s needs and allow
consumers to make the most of every exchange.
In tandem with respondents’ view of a shift away from
physical money, they also strongly promoted the idea of
a single global currency that is universally convenient to
consumers, regardless of the country they reside in, and
which is monitored by a global institute such as the
World Bank. However, they also envisage a future where
entirely new currencies will be formed. These currencies
could be based on social behaviour or be backed by the
barter of goods and services:
• An eco-friendly, behaviour-dependent currency. One
respondent postulated flower points, a currency where
people accrue money (money equals ‘flowers’) by
participating in environmental or ecological activities.
“Flowers to encourage green behaviour. ‘Flowers’
is a green worldwide currency that can be used
to buy ecological products.” - Limonade, France
• Skills as a currency, where skills are exchanged for
other skill sets
Many of the ideas were literally out of this world (see box
below), and implausible in context of today’s established
monetary systems. That said, future financial leaders will need
to think expansively as the next generations of consumers will
no longer be constrained by physical money and will expect
the function of money to be multi-faceted.
Case Study from eYeka: “Stars and Stripes”
By Anduze, France
It was a Friday morning in December 2028. I woke up and
received the news. People around my bed are telling me that
I’m allowed to leave this place where I’m staying. I’m in a clean
room with a bed, some lamps, a nice painting and a huge
screen, like a window. There I can see the sky, but also
watch movies and games.
A few days ago they told me that I was hospitalised for a long
time and that they had taken care of me during the long period
that I was unconscious. Apparently until this week I had been
in a coma for 14 years. They were unable to tell me exactly
what had happened before I ended up here. Most of the staff
are new and could only explain that I survived head injuries.
Nobody could tell me what caused this. They took off
all the wires on my body, wished me good luck and shook
hands. One of them, a tall guy, stayed with me in the room.
He sat down in a chair and said he wanted to give me a
message. I have no idea why, but he tried to inform me about
drastic changes in the outdoor world. There would be cars
without drivers, he said, air corridors for drones, outdoor
screens to guide people and much, much more. With a smile
on my face, I listened but I had difficulty believing him and
imagining how big the impact might be.
He also said that via an institution called the ‘Milky Way’,
everyone received virtual stars. The number could differ from
place to place and among countries, based on the economic
circumstances and the need. A certain amount of stars would
become stripes. So there were stars and stripes and you were
able to collect these stars and stripes in different ways. The
stars could be used for purchasing goods or services or
travelling. In return, it was possible to earn stars by studying,
caring for the environment, for rating movies, programmes,
services and so on, an almost endless list of possibilities. For
example if my host paid for my drinks, he would have earned
stars for helping me and that means he would not have to
spend anything! In a secure and simple way, communication
devices would take care of registering for activities, earning
and spending. These would be based on personal needs and
on one’s profile. Being inventive, innovative, active and helpful
could help you earn more stars and stripes for a relaxed life.
Even with a basic amount of stars, one would be able to
have housing, food and also an education.
This exercise led to some interesting perspectives that we grouped into six major themes.
25. THEME 4: ROLE OF BANKS IN THE FUTURE
The financial services industry is ripe for disruption by
various technological entrants, to the extent that banks
may find they are no longer vital to the financial
ecosystem.
Many participants in the eYeka exercise believe the role
of banks will become more peripheral and limited, shifting
their current dominant position in the value chain.
Here’s a sample of views along this line of thinking:
• Once a biometrics-powered payment process aided
by chip technology, is in place, the role of banks will be
constricted to analysing trends in payment transactions.
• Banks will no longer be at the centre of the payment
ecosystem, but rather one player in a crowded field
and of limited relevance.
• With an influx of new digital currencies, the economics
of money and its availability will not be managed by
either banks or governments but rather by a
multinational such as Google or Apple.
From a more general perspective the relationship with
money goes beyond payments and participants in the
contest highlighted:
• Help consumers save/spend effortlessly based on the
detection of consumer behaviours
• Act as advisors or experts in the management of
money, investment advice and budgeting
- Prevent clients from spending too much, especially
as the purchase process is made easier
and easier
- Provide information on financial products
“Have the bank tailor a product for me. It will no
longer be a fixed financial product offered by the
bank and I can either take it or leave it. Instead
it represent a true collaboration so we can both
grow financially.” - Maja, Serbia
THEME 5: TRADING PRIVACY
FOR CONVENIENCE
Technology companies are pushing the boundaries of
what’s possible — deepening their involvement in our
daily life in the process — and are seen as a trusted
manager of financial services.
The idea of an experience-centric ecosystem of payment
transactions will only gain traction as related technologies
continue to advance. While banks still believe that
confidentiality is a value cherished by their clients,
consumers appear increasingly willing to trade privacy for
ease of use. Apple Pay and Google Wallet are successful
examples of customers trusting their credit card details
to the companies’ servers in exchange for a powerful
payment experience. In that sense, Google, Apple and
other technology giants are influencing consumer
behaviour. Customers are willingly placing increasing
trust in these players to help manage their finances,
leading them away from banks.
THEME 6: EMPOWERED CUSTOMERS
Consumers around the world are aware of their
influence and power. They wish to be acknowledged
and appreciated.
This is propelled by a guiding philosophy of ‘What’s in it
for me?’
• If nature and the environment win – I need to win
• If the banks win – I need to win
• If brands win – I need to win
• If I am loyal – I need to win
This attitude fits perfectly with the Generation Y mindset,
which is more focused on personal gain and benefit.
Several eYeka respondents indicated they should be
recognised and compensated no matter what the activity
or transaction. One posited that gamers should be paid
by the gaming companies as playing games and
forming online gaming communities help the companies
gain traction and earn advertising revenue. Another
respondent envisaged getting paid for being eco-friendly
and recycling. Others focused on social currency — earning
more when saving more and customised shopping
experiences — forming the outline of a financial ecosystem
where different currencies based on enhanced customer
experience evolve.
By Anduze, France
26. 26
SO WHAT DID WE
LEARN?
Banks’ services have been critical to world economic
development throughout history and consumers still
regard them as the most secure means of managing
their finances. Safety processes that are governed by
strong regulatory functions and a robust bureaucratic
approach have positioned banks as the primary
institutions for services such as compliance, licensing
and risk mitigation. Coupled with long-standing
information systems and stable back-end procedures,
banks’ relative stability in operations has shown this
trust is not misplaced.
However, as we saw earlier in this paper, money both
as a concept and as a form of payment is evolving fast.
The reason for and enabler of this shift: technology.
Shortened technology and innovation cycles have
allowed other players to challenge the hierarchy in the
financial services sector. Banks have their stable and
established infrastructures, but their complexity and
inertia to change has enabled the influx of tech players
to position themselves as primary payment-service
providers that are better able to cater to customers’
rapidly evolving expectations. Going beyond the way
payments are processed, the construct of money itself
becomes unclear. Alternatives to traditional currencies
are gaining traction, which could soon enable complete
ecosystems to function without banks.
While the rules applied to new entrants and new forms
of money are still maturing, regulators will catch up.
Most countries have launched studies to establish
applicable compliance policies to protect consumers,
but while this will raise the entry barrier it will not shield
the banks against change and challengers will adapt to
function within the applicable guidelines.
Finally, we saw that consumers are eager to move
forward. Not only have they digested recent
technological advancements in the digital age,
they want more — a lot more. From a single global
currency to ethical perspective in the essence of
money, the fundamentals are relevance and
zero friction.
Having in mind the role of banks in today’s payment
landscape, these trends seem to indicate a future
without them. Short of a rapid reaction, established
financial institutions could see their stronghold in
the current value chain diminished if not
extinguished altogether.
27. PERCEIVED
VALUE BY END
CUSTOMERS
TIME
Reclaim client ownership
- Develop CX strategy
- Create own ecosystem
Provide services
to CX owners
- Clear new currencies
- Provide infrastructure
Loose control
A B
CUSTOMERS
EXPERIENCE
(CX)
PROCESSING
C D
27
DEVELOPING A STRATEGY:
HOW TO STAY RELEVANT
As discussed earlier, both objective
data and subjective opinion
demonstrate a decline in the
perceived added value of banks.
In the retail payment landscape,
ownership of the customer is being
lost as other players champion the
customer experience. That said,
we think financial institutions that
adopt a clear strategy can still
claim their place.
We see the world of payments
evolving in two main directions :
In one direction, electronic
currencies will further support
the way people are conducting
business and in the other,
open-ledger-type digital monies
(e.g. Bitcoin) will gain market share.
Financial institutions must integrate
both into their retail strategy.
Ripple Makes Waves
U.S.-based Cross River Bank is
pioneering the Ripple protocol
(a payment system developed
by San Francisco start-up Ripple
Labs to connect disparate financial
networks) to offer real-time
international banking between the
U.S. and Western Europe. Ripple
offers an advanced settlement
infrastructure for instant, secure,
compliant and affordable
cross-border transaction services.
In building a ‘digital money’
strategy, all five dimensions of
money discussed earlier — type
of transaction, mode of transaction,
supporting technology, operator/
issuer and substance — have to be
considered. Banks need to assess
each of these dimensions to ensure
a successful digital transformation.
Appetite and investment ability
in each of these dimensions will
dictate how much banks will
be able to influence their
marketplace position.
Figure 10: Evolution of perceived added value by customers
28. BUILD USER
EXPERIENCE
(INTERNAL
PROCESSING
STILL REQUIRED)
FOCUS ON
PROCESSING
INTERNAL ORGANISATION
BRANDING
EXTERNAL
POSITIONING
3 4
1 2
Invest in developing customer and
user relationships by improving
existing assets
Launch a new value proposition
competing with user experience
experts from digital space
Organisation Branding
Transform existing IT to support
partners and competitors and
focus on B2B for retail market
Create an IT/infra-service provider
to support partners and competitors.
Define new offerings and packaging
of the IT solution
• Lose control and abandon
day-to-day payments. Leave
this we see different fundamental
alternatives for banks to consider
when it comes to payments:
area to other players to focus on
larger transactions or bundled
products where payment is
combined with other financial
products and services.
• If you can’t beat them,
partner with them. Focus on
processing capabilities by
investing in infrastructure and
core banking competencies to
support partners (e.g. retailers
or tech companies) or complete
ecosystems by forming large
platforms with uniform and
regulated processes.
• Move up the chain. Reclaim
the client relationship by
shifting focus to where the value
for end-users lies (ease, speed of
execution, user co-creation and
empowerment). Compete directly
with new entrants by leveraging
expertise in financial advice
and more complex money
transactions (investments and
loans) to dominate the niche.
Whatever the selected option, banks’
ability to cope with new forms of
money will rest on their becoming
either front-end players managing
digital money transactions or
back-end enablers and/or
guarantors of future regulatory
frameworks, including controls
against risk and fraud, e.g. in
cryptocurrency transactions.
But the challenge does not end
with defining the business model.
Largely underestimated, it’s the
ability to execute strategy that
brings success or failure. Following
so-called iceberg logic, 90 percent
of the effort resides in translating
ideas into results.
The matrix shown below proposes
a pragmatic view of ways to create
a digitally advanced organisation
able to compete in a multi-money,
real-time, mobile and
consumer-centric world.
A combination of these options is
possible, but we believe that limits
the chance of success in a world of
scarce resources. The power law
suggests large achievements are
the result of uncompromised
investments rather than being
triggered by diversification. If you
don’t go all in one direction, some
else will do it and gain the right to
win. On a similar note, there are grey
zones between the options described
here. Progressive business and
operating models are possible, each
of these placing the cursor between
internal and external, between utility
and end-client ownership.
The vertical dimension looks at the
offering (external). It is critical to
define how the service is positioned
in the chain and who the targeted
customers are. Value can either be
extracted by owning and retaining
the client or by enabling partners
with expertise in back-end
infrastructure and
processing capabilities.
The horizontal dimension looks at
the operating model (internal).
Two macro scenarios exist: either
the existing institution tries to go
through a transformation exercise
by enhancing its existing digital
channels or an independent entity
is created or acquired with the
ability to grow as a start-up.
28
Figure 11: Possible strategies for banks
29. “BANKS POSSESS
INFRASTRUCTURE, SOLUTIONS
AND ESTABLISHED PROCESSES.
THESE ARE STRENGTHS
THAT THEY SHOULD
BUILD ON”
Akos Turny, Head of Product Management
(Digital Channels), Misys
“NEITHER GAFA NOR BANKS
CAN ACHIEVE MARKET SUCCESS
ON THEIR OWN AS THEY
CANNOT PERFORM THE WHOLE
VALUE CHAIN OF RETAIL
BANKING INDEPENDENTLY”
Olivier Crespin, Head of Digital Bank, DBS
30. 1. Leverage internal assets,
enable partners:
Strengthening back-end
infrastructure is an efficient way for
banks to gain a competitive edge
in the digital age. Given that banks
today operate in an environment
that spans geographies and
languages as well as different
regulatory regimes, their systems
already allow them to build and
transact complex products.
Pushing these abilities forward,
an extension to cloud computing
would not only help banks remove
some constraints from legacy IT
systems but also enable them to
integrate new technologies. With
this strategy, payments — and to
a certain extent digital money
— could be processed, keeping
banks at the heart of the system,
even if their medium i.e. money,
changes form.
This strong value proposition
could be packaged and offered
to partners that have demonstrated
their focus on the client experience.
Unity bringing strength, a
consortium between banks and
retailers could represent the
winning combination.
2. Build new engines for
merging ecosystems:
Following a similar value
proposition as option one,
option two represents the view
that transforming the existing
entity is not realistic.
The complexity of current
architectures means even a small
change can be a challenge.
Considering the magnitude of
adaptation required to become a
credible player building the next
generation of payments, technical
rigidity makes it impossible
for traditional institutions to
manoeuvre fast enough.
The logical workaround
is to start fresh.
Companies are being created
with new technologies at their core.
NoSQL databases, the latest coding
languages, cloud and distributed
central processing unit power all join
forces to constitute next-generation
payment-processing platforms.
With option two, investments are
made in building rather than in
transforming.
3. Stand proud, claim back the
client relationship:
Customer experience, including the
quality of service and ease of use,
is a key differentiator in any
organisation. A large number of
U.S. banks have invested in personal
finance management (PFM)
software coupled with customer
data mining (to consider both
small and big data).
The aim is to provide more
value-added services to
customers through smarter insights
into what they want and therefore
to strengthen their relationship
with the bank. Mobile-banking
apps such as Standard Chartered’s
Breeze mobile have proven
successful in enhancing
customer interaction and stickiness.
Banks are sharpening their focus,
but they still have some way to go
before understanding customers
as individuals (as opposed to
segments) — their emotions, their
stage of life, their employment
and their hobbies and routines.
Enhancing the user experience is
a continuous process that involves
regular updates and improvements
to refine operations and strategies.
At the moment, payments as a
standalone component is not much
valued by customers looking for
end-to-end journeys such as
shopping (including managing
vouchers and miles/rewards)
or entertainment (including
managing bookings).
Owning the payment component,
banks could facilitate the complete
experience though regulatory
limitations might force them to
do this through links with
merchants. Moving up the value
chain requires restructuring an
organisation in such a way that
digital teams are intrinsic to the
existing business.
This requires bringing in experts
who can introduce the overused
‘outside-in’ transformation in the
traditional banking culture.
Innovative banks should move away
from multi-channel offerings trying
to marry legacy and new client
interactions models.
From our perspective, omni-channel
means the right channel available
any time anywhere, rather than
all possible channels.
4. Build new marketplaces,
act as facilitators:
While option four follows the
business objective outlined option
three, it differs in two key aspects.
On top of the limitations due to
legacy architectures, it takes into
consideration a major roadblock
often faced by banks in reclaiming
the client relationship – people.
Systems are difficult to change and
the clients themselves even more
so, consciously or subconsciously
resisting a new direction.
The reason relates to the fact that
banks are traditionally risk-averse.
However, evolution means change,
and change implies risk.
The risks of having a negative
impact on the current customer
base, disturbing employees,
shaking egos or highlighting
conflicting agendas are often
considered unbearable and
therefore annihilate the ability
of traditional institutions to
evolve to the extent necessary.
Given that, building fresh teams
without past limitations is the right
approach. Venture capitalists tend
to think that the team makes the
difference and incentives must
be aligned. Huge teams and the
million-dollar salaries of banking
executives might be seen as a
weakness rather than a strength
when it comes to breaking with
current behaviours.
30
31. Strategy Opportunities and Benefits Challenges and Risks
1. Leverage
internal
assets, enable
partners
Medium
- Considers existing abilities and therefore
does not require large transformation
- Leverages a strong, secure and reliable
banking infrastructure
- Enables cross-selling with other products
and services
- Takes place in a clearly regulated environment
Medium
- Adapts current B2C model to a B2B2C model
- Produces limited revenues generated from
processing simple payments
- Compounds retention issues of customers
due to a reduced engagement
- Requires a strong brand already positioned
as innovative to appear credible
- Necessitates the optimisation of processes
to enhance productivity and efficiency
2. Build new
engines for
emerging
ecosystems
Medium
- Creates a more nimble entity able to cope
with the digital environment
- Allows real outside-in perspective in developing
business and operating models
- Uses new technologies at the core of the
offering with a dedicated architecture that
will fully enable the value proposition with
no compromise to existing services
Medium
- Requires striking the right balance between
full independence (and potential conflicting
agendas) and leveraging synergies with the
mother company
- Increases group governance complexity
- Implies efforts linked to the development
of new branding
- Calls for the definition of an applicable
regulatory landscape
- Entails building a new talented team with
limited pressure to transfer staff from
the mother company
3. Stand proud,
claim
back client
relationship
Medium
- Defines new revenue streams to compensate
for a drop in existing products and services
- Generates client stickiness through end-to-end
customer journeys leveraging partners to bring
in the rationale (e.g. shopping)
- Repositions the complete organisation as a
customer-centric entity
- Limits efforts required to get buy-in as this is the
existing strategy for most banks
High
- Fosters extreme competitiveness and leaves
limited room for partnerships
- Implies a significant amount of investments
with unclear payback calendar
- Slows down implementation speed compared
with new players (buy or build)
- Requires building on existing legacy
architecture
- Demands a very high ability to change
- Forces play within the banking regulatory
landscape while new competitors have
more ‘room’
4. Build
new
marketplaces,
act as
facilitators
High.
- Looks at new client needs and behaviours
with a fresh perspective. Existing products
and services are only considered in
a second stage
- Concentrates fully on new strategies with
no or limited dependency on legacy and
internal constraints
- Increases control over customer journeys
and partners
- Enables generating revenues from different
sources, with payment a subcomponent
in the offering
- Helps appropriate brand positioning
High.
- Requires identifying the right value proposition
in a confusing environment
- Necessitates a very strong partnership model
with a large number of entities; the bank will
play the role of facilitator
- Requires understanding the applicable
regulatory landscape
- Implies the development of an open platform
based on latest technologies allowing easy
connectivity
- Needs a complete branding strategy
Figure 12: Details on possible strategies for banks
32. FUNDEMENTALS
AND PRIORITIES
In day-to-day payments, we believe banks have to make a choice between acting as processing
entities and developing their own ecosystem. Staying in the middle will probably not be sustainable.
Game plans will depend on different factors but payments will be the domain of the big players.
Today a number of companies have entered this space but consolidation is the only way forward
in our opinion.
All the strategies described above share some fundamentals that have to be considered and which
should drive a large part of a bank’s project portfolio over the next two years:
• (Next six months)
Clarify current and future positioning of the bank
in the next decade, which requires understanding
the market and the challenges, strengths and
opportunities to explore potential scenarios.
To avoid the status quo, banks have to make sure
the team responsible for these views includes not
only traditional bankers but also those with a
mindset shaped by the digital age.
• (Next 12 months)
Work very hard on culture and governance
to implement a lean environment with a fast
decision-making process (i.e. it should take
a maximum of four meetings to reach
a decision) and which tolerates some
failure. Stay open-minded and foster
experimentation.
• (Next 18 months)
Develop partnership models to easily join or
create ecosystems where the value proposition
is a combination of products and services.
Whether banks will own the customer journey
is a larger question, but in the short term they
can leverage various data points to improve
their knowledge of customers.
• (Next 24 months)
Improve back-end platforms: Open APIs to
increase flexibility and integration with
external parties and develop flexibility
in IT/infrastructure/processes.
• (Continuous)
Bring in external perspectives from other industries
and leverage crowdsourcing initiatives to identify
ideas (not just incremental evolutions).
Decentralise innovation projects and establish
‘vertical teams’ to foster an unhindered
skills-and-knowledge sharing culture.
Don’t discount the ‘black swan’
(referring to Nassim Nicholas Taleb theory).
• (Continuous)
Get close to solution providers (start-ups or large
companies) to contribute and absorb innovation
thanks to user groups, conferences or even
direct investments.
In this changing landscape, the ability to be part
of idea creation and early stage execution is key
to staying ahead of the game.
32
33. CONCLUSION
Technology has always supported the evolution of
commercial offerings by enhancing quality, reducing
prices and increasing reach to ever-wider geographies.
In the digital age, the border between business and
technology has almost disappeared and it’s become
impossible to say whether it’s IT innovation or new
value propositions that came first. On the edge of
this rhetorical question, new monies that don’t
require banks to operate have emerged.
They pioneer architectures and valuation logics that
open the door to a world of opportunity or threat,
depending on the perspective. The rise of new entrants
who not only possess a mindset that mimics that of
the end user (the customer) but who also play the
card of technology faster and smarter, have moved
beyond being a threat to traditional institutions to
owning large shares of the market, crystallised by
GAFA’s increasing presence.
The time has come for bold moves. In this context,
digital should not be seen as a chapter in company
strategy but as the environment in which any
meaningful plans have to be developed, as it both
changes value propositions and interaction models
within the complete ecosystem (i.e. customers,
partners and staff).
We believe the payments market will be polarised
between the two points described earlier: processing
entities at one end with companies owning the end
customer at the other.
While most banks think they have chosen the latter, the
‘me too’ strategy will have very limited impact. Success
in this space will require vision and the ability to take
risk in defining the future. Our research shows that this
future considers new monies as a credible alternative
to traditional currencies.
No matter which of the four main strategies (discussed
in the previous section) it selects, a bank needs strong
conviction to help steer it during turbulent times. But
under the cover of trying to provide customers with
what they want or what they need, most financial
institutions lack conviction (an opportunistic
strategy usually means no strategy).
Their approach most often involves market surveys
and other lengthy consultant assignments, supposedly
to discover what people want, but breakthrough
innovation cannot be achieved by using average
market perceptions. The mean (as in maths) opinion
might save banks from big mistakes as much as it
will prevent them from creating value.
We think winners in the payment space will be
those who take risks and are bold.
Lukewarm value propositions trying to appeal to
the average will likely separate the winners from
the losers in the near future.
33
34. 34
APPENDIX/REFERENCES
1) http://www.forbes.com/sites/ryanmac/2014/09/23/paypal-takes-small-step-toward-bitcoin-partners-with-cryp-
tocurrency-processors/
2) http://www.cryptocoincharts.info/coins/info
3) http://gtnews.afponline.org/Articles/2014/Virtual_Currencies__Learning_to_Live_in_the_Physical_World.html
4) http://www.businessinsider.com/the-wearable-computing-market-report-2014-10#ixzz3QvofyJRD
5) ‘World Payments Report, 2012’
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