10
thADVANCED
Payments Report
2016
SPONSORED BY
Edgar, Dunn & Company © 2016
FRANKFURT • LONDON • PARIS • SAN FRANCISCO • SINGAPORE • SYDNEY
Edgar, Dunn & Company (EDC) is an independent global financial services and payments consultancy.
Founded in 1978, the firm is widely regarded as a trusted advisor to its clients, providing a full range of strategy
consulting services, expertise and market insights.
From offices in Frankfurt, London, Paris, San Francisco, Singapore and Sydney, EDC delivers actionable strategies,
measurable results and a unique global perspective for clients in more than 45 countries on six continents.
Global Experts in
Payments Consulting
Advanced Payments Report 2016
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This year the report is sponsored by
wirecard, the global financial services
and technology company, which holds a
banking license. wirecard is a key player
and innovator in the digital payments
world and helps a number of companies,
ranging from FinTech start-ups to large
entities, retailers and airlines meet their
digital payments needs.
The Advanced Payments Report (APR) combines views
and perspectives obtained from industry executives,
the results of an online survey, and continuous research
and monitoring of events in the payment industry.
it highlights key advanced payment trends. while its
focus is on payments, payments cannot be detached
from the broader fabric of integrated financial services in
today’s digitally connected world.
A question that arises continuously in this interconnected
world is whether the banking industry is ripe for
disruption? The answer to the question from many start-
ups would be a resounding "yes" as they discover and fill
the gaps in products and services offered by traditional
financial institutions. “we actually are trying to change
banking entirely. we are trying to displace what we think
is a fundamentally broken system,” said Mike Cagney, CEo
of Social Financial or SoFi, a financial services start-up, in a
recent interview with CnbC.
but despite the billion dollar valuations, innovative
business models and promises to unlock an alternative
financial universe, the impact of new players on the
banking industry has been relatively less disruptive.
unlike the travel industry where online booking engines
and mobile travel apps disrupted the agent assisted
model and where new players continue to innovate,
or the seismic shift caused by uber, Lyft, or Didi in the
taxi industry, or the popularity of Airbnb which offers
an affordable alternative to hotels, banking industry
stalwarts have so far proven more difficult to displace.
one reason for this resilience is that banks as custodians
of customer deposits and lenders of funds have highly
developed risk management systems that ensure they do
not fall foul of rules and regulations designed to protect
consumers, the institutions themselves and the economy
in general. As such many start-ups tend to partner with
financial institutions to comply with licensing laws.
They also do so to take advantage of the widespread
distribution networks of banks and their access to
cheaper sources of funding such as deposits.
in payments, however, not only start-ups but also large
technology companies are investing in innovations and
new technologies. Mobile wallets continue to cause a
stir in the payments industry. The wallets are designed
to offer convenience to consumers by allowing them to
store their payment cards, loyalty vouchers and even
travel documents such as boarding cards for easy access
and use. but wallets have long been the subject of much
debate, discussion and controversy. wallets developed
and rolled out by mobile network operators (Mnos)
struggled to attract consumers, and some had to be
closed down with industry momentum now shifting to
mobile device manufacturers such as Apple and Samsung.
Apple Pay, introduced in late october 2014 in the united
States, significantly revived the sagging interest in mobile
payments and was quickly followed by Samsung Pay (uS
and South korea) and Android Pay (uS only) in 2015. Apple
Pay has expanded in February 2016 in China and is set to
roll out in additional countries in 2016. it is still early days
for these wallets, and transaction volumes are not entirely
representative of their future potential. Digital wallets
have come a long way when it comes to ease of use and
simplicity of set-up. For example, it takes minutes - not
days - to ‘provision’ or register a customer to start using
one of these wallets and for some of these wallets, there
is no need to open the app in advance – your fingerprint
does that.
Overview
Towards invisible payments
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while these wallets are designed
for in-store point-of-sale (PoS)
environments, they will also
be used for all types of digital
purchases. Other wallets that store
funds (and not payment cards) have
prospered in markets like india and
China where use of payment cards
is still not mainstream. Prominent
examples include Alipay and
weChat Payment in China and Paytm in india.
Making money flow better across the globe is still a
focus for a number of start-ups. This has been the
historic preserve of banks and money transfer operators
(MTos) but companies such as worldremit, Transferwise,
TransferGo, and Remitly have leveraged innovative
business models to play in an industry which carries
risk and where traditionally it has been difficult to
differentiate other than on price.
on the cutting edge of digital commerce are advances
related to the internet of Things (ioT). The ioT is a term
coined by an MiT researcher to explain the next evolution
of the internet, the super-connected internet in which
not only computers, mobile phones, or tablets will be
connected but all types of ‘things’; home appliances and
machines that we use every day, such as cars and even
planes; things for sports, such as tennis rackets, cricket
bats or golf clubs; and billions of other things, including
wearables such as clothes, watches and shoes.
The ioT will create a complex demand
for payments across individuals and
businesses because of the sheer
number of things connected
and the complexity of services
that will become available.
Global commerce will expand.
Commercial payments will range
from large transactions between
businesses down to micro-
transactions between multiple
individuals located anywhere
in the world.
banks and payment intermediaries
will always have a role to play in payments,
facilitating payments via bank accounts or credit cards
because consumers trust these mechanisms and they
provide recourse should something go wrong.
Or, perhaps, they may not? while
bank transfer systems and credit card
services are continually improving
in speed and security and adapting
well to the evolving internet, digital
currencies are designed specifically
for the internet and these may,
in time, become more and more
relevant for digital micropayments as
new ioT services are rolled out.
innovations that validate transactions and confirm
contracts to support systems of value exchange will be
equally important in the future. blockchain, a technology
inherent to the concept of bitcoin, for example, may find
use cases that go beyond digital payments to provide
universal open standards for validating all types of
financial transactions.
wherever the future may lead us, one thing for certain
is that in order for innovations and new services to be
successful, regardless of how sophisticated or technical
their development or delivery may be, they will need to be
intuitively simple for consumers to understand and use.
Daniel kahneman, the behavioural psychologist famous
for his work on how people think and make decisions, and
winner of the noble prize for economics in 2002, describes
in his best seller, “Thinking Fast and Slow”, the key to
how consumers think. Most consumers are lazy - or in
kahnemann’s polite scientific jargon - consumers tend to
be “cognitive misers” who make decisions and judgement
calls based on quick and instinctive impressions
(intuitive or “fast” thinking), not wasting
their cognitive resources on analytical
deductions and logical thinking
(deliberate or “slow” thinking).
Future successful systems of value
exchange will be entirely digital
and in order to be successful,
they will need to be designed
for the ultimate cognitive misers,
operating quietly in the background
where, says Christian von hammel-
bonten, EvP Global Product Strategy at
wirecard, the key challenge for payment
providers will be “to make themselves invisible
but not redundant. The key to success for all forms
of commerce will be a seamless, efficient and secure
payment experience.”
“The ioT will create
a complex demand
for payments across
individuals & businesses
”
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Advances in the development of mobile
devices have created the phenomenon
where consumers can easily research
products and shop at their convenience
– anytime, anywhere. new technologies
have blurred the boundaries of physical
and online commerce, enabling new ways
for merchants to communicate with their
customers.
Leading retailers, technology companies and social
media platforms are continuing to explore opportunities
to promote deeper engagement between businesses
and consumers. For example, Facebook is working on
bringing businesses onto its Messenger app, which
allows consumers to interact with a business through
conversation threads. Consumers can ask questions, make
reservations or purchase products or services by text-
messaging a merchant.
Once the consumer opens a thread to communicate with
a business, that thread will stay there forever. This allows
that business to know its consumers better as well as
keep in touch with them. while David Marcus, a former
president of PayPal and current vP of Messaging Product
at Facebook suggests that Facebook is merely taking
“the first baby steps” toward transforming interactions
with businesses, the Chinese messaging app, weChat
has already allowed its users to order taxis, check in for
flights, pay utility bills, make doctors' appointments
– all without leaving the app. Amazon, on the other
hand, allows its users to communicate with buyers in
the Amazon marketplace via email with its buyer-Seller
Messaging Service. while businesses on messenger is
popular in China, the concept is still fairly new elsewhere.
nonetheless, the potential impact of messaging on
commerce is great. it might blur the boundaries between
different sales channels even further.
omni-channel
omni-channel, a multichannel approach to sales, used
to be a buzzword but now has become an expectation
that merchants cannot ignore. “An in-store transaction
will replicate the same customer experience as an
e-commerce transaction: browsing for goods with a
smartphone, a tablet or an in-store kiosk, adding items
to the physical shopping cart or the virtual basket and
then checking out by paying with the smartphone. The
customer will not distinguish between online and PoS
experiences as they will be completely blurred,” says
Susanne Steidl, Executive vice President issuing Services
at wirecard AG.
omni-channel capabilities bring a unique set of
opportunities for merchants, allowing them to provide
consumers a frictionless shopping experience regardless
of whether the customer is shopping in a store or online
using a desktop or a mobile device. Through these
channels, merchants can also increase brand awareness
and loyalty. however, there are challenges. Providing
detailed product information and embedded payment
functionality over a number of distinct channels can be
difficult and expensive.
All three key stages of the purchase transaction in which
merchants engage with consumers – pre-purchase,
purchase and Post-purchase – are being impacted by
the changing focus of retailers on providing a seamless
shopping experience across all channels.
Where Digital Meets Physical
Blurring boundaries
“64% of survey respondents
believe that mobile
self-checkout apps will help
create a seamless shopping
experience
”
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Pre-purchase
Consumers may use the internet to ‘channel-surf’, .
research an item through one channel and purchase it via
another. 'Showrooming’ is a well-established practice
in which consumers purchase items online, having
researched and tested them out in a physical retail outlet.
interestingly, only 60% of webroomers have showroomed
but 90% of showroomers have webroomed according to
Merchant warehouse. The evidence therefore indicates
that consumers – whether they are ‘channel-
surfers’ or not – like to purchase in
a physical retail environment.
both trends are frowned upon
by retailers, although some
– such as John Lewis in the uk
– have embraced them by
encouraging shoppers
to check product details
using the retailer’s app
while in-store.
Another useful
crossover between
the physical and online
retail environments is the
‘end-less aisle’ approach now
being adopted by some retailers.
Consumers are provided with in-store
kiosks that have access to the retailer’s
full product offering and stock levels so
that most out-of-stock scenarios are avoided.
Staples and a number of other large omni-channel
retailers use this approach to great effect.
Purchase
Purchasing is now being made easier through initiatives
like the ‘suspended basket’. Merchants such as burberry
would like to introduce a facility through which
consumers could order products via any channel (even in-
store), the products would be retained in the consumer’s
account basket for a pre-established period of time,
and the consumer could amend the basket and initiate
payment via any other applicable sales channel.
Payment at PoS is no longer simply a matter of inserting
or swiping a card at a fixed checkout location in a store.
use of Mobile PoS (mPoS) terminals in-store is
becoming more widespread. This year’s survey
results indicate that a high percentage (76%)
of industry executives believe that retailers
will replace traditional PoS terminals for
mobile devices that include additional value
added services (vAS) such as data analytics
and inventory management applications.
new models have emerged where
purchasing in a physical environment
requires limited interaction
with sales staff, either at
a contactless kiosk or
‘in-app in-store’, such
as using the PayPal
application to pay for goods
on a mobile handset while in
a physical retail outlet. 64% of
survey respondents believe that mobile
self-checkout apps will help create a seamless
shopping experience, especially from the largest
retailers in the next 2-3 years.
> More payments will be embedded in the commerce transaction and the
merchant will own the payment experience
> Mobile self-checkout apps will help create a seamless shopping experience;
it will win adoption from big-box retailers in the next 2-3 years
> Large retailers will continue to move away from traditional POS terminals
to mobile ones and will include value added services
The future of payments for physical retail stores
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The future of payments for online commerce
> Fraud will remain a top concern for online commerce
> The use of social media by businesses will continue to
increase for marketing and communication purposes
> More people will shop using apps as well as make
payments inside the apps
> Security concerns may further drive consumer adoption of
digital wallets
> Social media platforms will capture a larger share of the
online commerce spending
Post-purchase
Many pre-omni-channel retailers did not have centralised
payment management systems; . they had separate
ordering platforms, sales reconciliation systems and
payment service providers for each channel. Processing a
refund in-store of goods purchased online was therefore
a challenge if both channels had different merchant
acquirers and sales reconciliation platforms were located
in different countries.
however, omni-channel retailers are now benefitting from
a consolidation of service providers and are selecting
those that provide integrated back-office solutions
combining the ordering, payment and reconciliation
functions into a single platform.
The Amazon book store
Amazon opened its first physical retail store in Seattle,
uSA, at the end of 2015 and has introduced some
innovative policies there that place it firmly within the
blurred boundary of where physical retail meets the online
environment.
The Amazon book Store is stocked with books that
have been selected using Amazon’s recommendations
algorithms, so that post-purchase feedback from other
consumers is put to good use. Consumers can scan
book barcodes at a kiosk or use their amazon apps to
price check potential purchases or to read customer
reviews. webrooming is therefore actively encouraged
and consumers can get dynamic pricing based upon
the current price of the book in Amazon’s online store,
ensuring that the pricing is competitive against physical
book store competitors as well as online retailers.
Amazon recently filed for a patent for a physical retail
store in which consumers could purchase items (books
or potentially an extended range of products that are
available) simply by lifting them from the shelf and exiting
the store. Although it is not yet known how the consumer
making the purchase would be identified, once they have
been identified in-store and made their way through the
‘transition zone’ (check-out) with their selected item,
the item would be identified through an RFiD tag and
registered as sold. The consumer would then receive an
email notification from Amazon that the purchase has
been logged in their Amazon account, and that payment
has been processed using their preferred payment
method.
The patent for this approach is still pending but it would
be an interesting development for a retailer to introduce
exiting a retail location with a product as a payment
authorisation from the consumer.
Proliferation of digital payments options
According to eMarketer, retail e-commerce sales are
expected to reach $ trillion in 2016 and consumers are
expecting an ever-smoother payment process. while
payment cards are commonly used for digital payments in
some markets, there are hundreds of payment methods
worldwide, and many seek to bypass the card rails using
alternative forms such as online bank transfers, mobile
carrier billing and virtual currencies.
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Social commerce and buy buttons
Any business without a social media presence in 2016
is certainly lagging and 89% of our respondents believe
that the use of social media platforms by businesses will
continue to increase for marketing and communication.
however, only 51% think that these same platforms will
capture a larger share of the online commerce spending.
Facebook, the leading social network is looking to do just
that by transforming its ‘pages’ for businesses from a
place to grab business information and interact, to a place
to buy. if successful, Facebook could become a social
network filled with mini shopping websites or ‘pages’.
“buy buttons” look set to be the key facilitators for this
integration. Developed only a few years ago, they already
have made significant inroads in 2015. buy buttons
enable consumers to buy directly within a webpage or
app without having to leave the site. Google, Twitter and
Facebook are running trials with them and PayPal’s first
acquisition as an independent company was Modest, a
start-up that develops them.
Pinterest is a visual discovery app, where consumers
can explore anything from clothes to furniture. it
launched buy buttons or “buyable pins” in mid-2015 and
is considered the perfect social network for
social commerce. Shopify’s 2015 survey
highlighted that 96% of users go to
that site to research a product
before buying. while the
idea may be great, there
are difficulties with
implementation,
such as merchants
having to provide
real-time inventory
updates. Also a large
number of pins may
be unobtainable due
to no longer stocked
items, which may lead to
customer confusion.
Google, Twitter, amongst
other social platforms are all
looking for a way to get a piece
of the e-commerce pie and it is not
surprising to see why. According to Forrester
Research, consumers spend 14% of their smartphone time
on social media and 5% on shopping. The integration
of these two activities by the tech giants would enable
them to share a portion of the trillions of dollars to be
spent online in the coming years, as well as increasing the
inherent value of their ads.
in-app payments
88% of our respondents believe that more people will
shop using apps in the future as well as make payments
inside the apps. According to a 2014 consumer behaviour
survey by Forrester, consumers spend 85% of their time
on smartphones in apps so the opportunity for in-app
payments is significant.
uber is gaining popularity with its streamlined ordering
and seamless payment process in which the payment card
is registered initially, sometimes with a simple photo, and
then automatically charged after delivery of the service.
Apps like uber have revolutionised the way we order and
pay for taxis, and the model continues to gain traction in
other on-demand industries. Apps such as Delivery hero
(Germany) and Deliveroo (uk) are reshaping the takeaway
business, while washio (uS) and Laundrapp (uk) target
the laundry business. The rising success of these apps
proves the value consumers place on convenience,
of which in-app payment is a core feature.
Digital wallets
are growing mobile
67% of respondents believe
that online security concerns
will drive adoption of digital
wallets. The convenience
and recognised security
of these wallets have
helped drive their growth,
especially the familiar
brands such as MasterPass,
visa Checkout (which has
moved away from the “wallet”
connotation), PayPal and Alipay.
PayPal parted ways with ebay, and
the renewed independent focus is
working for the company as total payment
volume grew 27% to $282 billion in 2015.
Alipay, set up by Alibaba in 2004 before being spun off
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under Ant Financial, processed an estimated $778 billion
in 2014. This reported figure, already dwarfing PayPal’s
2015 number, is likely to be significantly larger in 2015 as it
boasts a 65% market share of the Chinese online payments
market.
interestingly, both wallets have seen significant growth
in mobile with 28% and 65% of transactions initiated via a
mobile device for PayPal and Alipay respectively in 2015.
battling on against fraud
92% of our survey respondents believe fraud will remain
a top concern in the future of online commerce. This
concern is well noted when you consider that large
e-commerce and m-commerce merchants lose % and
% of revenues respectively to fraud according to the
2015 True Cost of Fraud Study.
3D secure continues to be one of the key defences for
online card payments but the mechanism is dated and
provides a poor shopping experience, reducing conversion
rates and negatively impacting merchant revenues. The
user experience becomes even worse on mobile devices
with many merchants simply refusing to install it on
their apps, which could be problematic, as 21% of total
e-commerce in the uS in 2016 is expected to be via mobile.
new ways for securing card payments online are being
piloted across the world. Getin bank in Poland and bPCE in
France have both launched pilots for cards with dynamic
card verification codes (DCvC). The DCvC replaces the
static three-digit security code on the back of the card
with a changeable code that is altered electronically every
hour. other methods to tackle fraud involving device
fingerprinting, biometrics, geo locating and behavioural
analytics continue to be developed.
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industry surveys in developed markets
report slow adoption or declining
usage rates of mobile payments among
consumers. The industry is divided in its
evaluation of this data. Some observers
say that the low usage rates are indicative
of a weak consumer value proposition
and are very sceptical for the future of
mobile wallets. others, however, are
more optimistic and believe the glass is
half full, not half empty.
They conclude that it is only the beginning for the mobile
wallet and the opportunity to achieve its potential
can be realised as the consumer value proposition is
strengthened, negative perceptions of security are
addressed, and widespread acceptance is finally achieved.
Edgar, Dunn & Company (EDC) 2016 survey results
reflect both perspectives but respondents in general are
optimistic with 66% indicating that mobile wallets will
continue to grow significantly, despite a complex and
already competitive landscape.
Mobile wallet taxonomy
A mobile wallet – also called an mwallet, digital wallet,
or ewallet – refers to an application used on a mobile
device that can store payment credentials that enable
a customer to make payments online, or in stores via
contactless technologies.
Consumers have no shortage of choices today, and more
options are expected to be introduced over the next few
years. EDC has segmented the mobile wallet offerings
into four categories, as depicted in the diagram below:
Third party wallets: provided by entities outside the
banking system such as mobile device providers and
mobile network operators (Mnos)
Merchant wallets: proprietary to a single merchant and
typically tightly integrated into that merchant’s online
digital strategy
Multi-merchant wallets: designed to be accepted by
multiple merchants who have opted into the programme.
They include merchant-specific loyalty capabilities as well
as payments
Financial institution (FI) wallets: offered by Financial
institutions to address the needs of consumers who
prefer to use the payment services from their trusted
Fi and do not really trust other entities to protect their
payment credentials. both open (multiple Fis) and closed
(single Fi) models exist
Mobile Wallets
Half empty, half full
note: consumers may choose to use more than one wallet
Third party
Financial institution Multi-merchant
Merchant
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Third party wallets
Since the launch of Apple Pay in 2014, followed by Android
Pay and Samsung Pay in 2015, wallet solutions have been
provided to users across most operating systems with
enhanced security and usability. As noted in the table
below, the solutions have many elements in common
but which differ in key areas, including the ability to
incorporate loyalty programmes and related incentives:
Additional wallet solutions include:
PayPal: expected to launch nFC capabilities within its
mobile app in the latter part of 2016. The uS and Australia
are expected to be its initial markets
Vodafone wallet: launched in 2013, it has enabled users
to make nFC payments via their visa and MasterCard
cards since 2015. it is available in Germany, italy, the
netherlands, Spain and the uk. PayPal has announced a
partnership that will enable PayPal to be used within the
vodafone wallet
Alipay wallet and WeChat wallet: Serving the needs
of Chinese consumers, both enable users to make
e-commerce and face-to-face purchases. both wallets are
expanding to provide purchasing options for travelling
Chinese consumers. Alipay is accepted in stores in Hong
kong, Singapore and South korea. weChat wallet plans to
partner with over 10,000 retailers in Japan over the next
three years
Merchant wallets
Merchants view the mobile wallet as a way to enhance
relationships with customers and to interact with them
on a much more direct and personal level. For many,
the mobile platform is key to their digital strategy and
their omni-channel approach. integrating payments
within their mobile apps is a logical development toward
reducing the friction in the payment process. Merchants
are actively investing in the development of proprietary
wallets, targeting their most loyal customers, in which
they can provide incentives that deepen relationships with
those customers. The Starbucks app, the leading example
of a merchant wallet, demonstrates the positive impact of
a wallet on a company’s brand.
Two of the largest merchants in the united States
announced their mobile wallet plans in December 2015:
Walmart launched a pilot of its own mobile payment
wallet, walmart Pay. The pilot is active in selected uS
stores and allows shoppers to pay with any major credit
card or debit card as well as walmart’s own gift card.
it uses walmart’s existing smartphone app in which
shoppers select their payment method, activate the
camera and scan a QR code displayed at the register.
Customers can then put their phone away while the
system connects the register and the basket of goods
being purchased with the payment method selected. An
e-receipt is sent to the app. nationwide rollout in the uS
is expected by mid-2016
Target, the fourth largest uS retailer, is widely
expected to develop its own mobile wallet leveraging
its app. Target’s wallet is expected to partner with
existing card products as well as its private label card
and may also rely on barcode/QR code scanning.
Rollout is unlikely until 2017
Multi-merchant wallets
These wallets provide payment services integrated
with loyalty and promotions at merchant locations that
participate in the service. Acceptance is not ubiquitous
as with the major credit cards, but merchants are
incentivised to promote the service to consumers. The
two leading examples are:
Merchant Customer Exchange (MCX), a consortium of
some of the largest uS merchants, pioneered the multiple
merchant wallet solution and is now in market trials with
its CurrentC solution. CurrentC enables consumers to
Apple Pay Android Pay Samsung Pay
Launch Date
(initial market)
oct. 2014 (uS) Sept. 2015 (uS)
Sept. 2015
(South korea
and uS)
# of POS Locations > 2M > 2M ~30M worldwide
Connection
near Field
Communication
(nFC)/
Secure Element
nFC/hCE
nFC/hCE and
MST (mag stripe
transmission)
Authentication
Tokenisation,
Fingerprint
Tokenisation
Tokenisation,
Fingerprint
Loyalty Programme
Support reward
programmes and
store-issued cards
Tie into
retailer’s loyalty
programme;
coupons/
discounts
Tie into
retailer’s loyalty
programme;
coupons/
discounts
In-app Acceptance yes yes yes
Fee
Charges issuer a
transaction fee
(uS)
no fee
arrangement
no fee
arrangement
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pay directly from their bank account, use store cards and
gift certificates (but not credit or debit cards). Developed
with the twin objectives of strengthening merchant
relationships with their customers and of placing
payments at the centre of the customer experience, the
retailer’s loyalty programme is integrated with CurrentC
so that offers and promotions can be delivered directly to
consumers. it utilises scanned QR codes as the interface
into the PoS systems
Chase Pay will be launched in mid-2016. Chase, in
partnership with MCX, will leverage MCX’s QR code based
technology and merchant acceptance network for Chase
Pay. Chase will pre-populate its customers’ Chase credit
and debit cards into the wallet, but it does not currently
accept non-Chase cards. Chase Pay promotes lower, flat
merchant fees to incentivise merchant acceptance. in
addition to MCX merchants, Chase Pay will be accepted at
Starbucks, which is an extension of Chase Paymentech’s
acquiring relationship with Starbucks
Financial institution wallets
Financial institutions are also actively investigating the
opportunity to provide their customers with wallets that
carry their branding. They are motivated by competitive
pressures to avoid being disintermediated by technology
companies like Apple and Google or by the emerging
merchant wallets. Financial institutions want to leverage
their relationship of trust with their customers while
ensuring that the core competencies of facilitating
payment transactions remain relevant to customer
segments who are digitally savvy and
expect to see services delivered via their mobile devices.
Some notable examples include:
both ugo and Suretap in Canada have evolved into open
wallets with multiple Fi partners. ugo participants include
Toronto Dominion, President’s Choice, MbnA and Cuets
Financial. Suretap’s leading Fi is CibC
The Capital one wallet in the uS is integrated into the
bank’s mobile banking app
banks and other providers in Europe have been focusing
on collaborative person-to-person payment solutions
which are discussed in a separate section of this report.
bkM Express, developed by bkM, the interbank card
centre in Turkey offers wallet holders the ability to make
online, mobile, and even person-to-person payments
Glass half-full
Survey participants are optimistic about the future
potential of mobile wallets. 66% responded that they
agree or strongly agree with the statement that proximity
payments are successful and will continue to grow. The
continued growth of contactless acceptance points and
the introduction of more robust rewards and incentive
programmes will likely fuel that growth.
This year’s survey respondents overwhelmingly believe
that consumers will continue to have multiple choices for
their mobile wallet needs. Despite a high expectation
(72% 0f survey respondents) of consolidation among
wallet providers, 73% of survey respondents believe that
multiple wallet providers and technologies will continue to
co-exist. only 60% of those surveyed believe that mobile
operating systems as a group will prevail and even fewer
(46%) believe that only one or two providers will dominate
the market.
how the so called "mobile-wallet" will play out
> Multiple wallets with differing technologies will co-exist
> There will be consolidation in the mobile wallet market
in the next 2-3 years
> Mobile operating system owners
(. Apple, Android, Windows) will prevail
> The large quantity of mobile payment methods will lead
to a more fragmented market
> One or two wallet providers will dominate in the market
73%
72%
6 0 %
59%
4 6 %
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Personal Payments
Making money flow
The most successful mobile P2P services
are located in emerging markets,
especially in Asia and sub-Saharan African
markets such as kenya and Tanzania. P2P
payments initiatives vary substantially
from market to market, offering an
increasing array of methods, transfer
speeds, technologies and business
models.
Emerging markets paradoxically present opportunities
for payments via mobile devices due to a lack of financial
infrastructure and low penetration rates for bank
accounts. More than 100 mobile operators in Africa have
launched mobile money services, the most celebrated
of which is M-Pesa, launched in kenya in 2007. 92% of
kenyans sent or received a mobile P2P payment in 2015.
Tanzania is also a key market as mobile operators have
joined efforts and enabled interoperability between
different money services - Airtel Money, Tigo, M-Pesa and
Zantel’s EzyPesa.
in developed markets
Personal or person-to-person (P2P) payments in
developed markets often refer to payments needed
to settle small personal obligations, such as for shared
expenses, and are typically paid in cash or cheques, but
other methods are available.
our survey revealed that respondents see promise in
some of the new actors in the personal payments area.
Mobile wallet providers win the top spot for the entities
most likely to lead in the future followed by real-time
payment systems and payment services provided by social
media players.
Digital P2P payment services, whether offered on
a desktop computer or over a mobile device, have
struggled to take off in markets with mature payment
infrastructures and high use of electronic payment
methods such as payment cards and bank transfers.
PayPal is the clear exception in many ways, having
pioneered online personal payments. A resurgence in such
payment services is underway as providers believe that
P2P payments driven by intuitively simple mobile apps will
prove popular, especially with younger consumers. PayPal
may appear ahead of the pack but others are gaining
ground.
The type of player more likely to win the P2P payments battle
> Mobile wallet providers (. Apple, Google Samsung)
> Real-time ACH systems (. PayM in the UK)
> Social media (. Facebook)
> PayPal
> Bank owned providers (. Clear Xchange in the US)
> Others
24%
19%
1 9 %
16%
1 6 %
6 %
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in the uS, venmo – a mobile P2P payment service and
part of the PayPal group reported total payment volumes
of $ billion, a 200% year-over-year increase in Q3 2015.
venmo has even engrained itself in popular vernacular
in the uS: “i will pick up the tab and you can venmo me
later”. Square Cash, clearXchange and Pop Money are
other popular P2P payment options
offered by both new entrants and
banks.
Payment messaging
A common trend in P2P payments
in Asian markets is their integration
with messaging apps. weChat, the most
popular app in China with 550 million
active users, launched its payment feature
in 2014 and it has been used by 80% of
its users to date primarily for micro-
payments and mobile games.
in 2015 during the Chinese new year,
weChat users sent more than 1 billion
virtual ‘red envelopes’ – a Chinese gift
tradition - filled with money within 17 hours.
A popular option was sending an envelope to a fixed
number of recipients within a group and the first to click
on the link would earn an unspecified portion of the total
envelope value. Tenpay, one of the two main wallets
in China, supports this payment function on weChat.
weChat, currently supporting nine currencies including
uSD, GbP and Euros, is adding b2C and overseas payment
features.
Today, weChat absorbs most of the transaction costs.
however, as of March 2016, a fee of % will be levied
on digital transfers to bank accounts when the sum
exceeds 1,000 yuan (approximately uS$153). P2P payments
between weChat accounts will remain free of charge.
kakaoTalk in South korea or Line in Japan are also
examples of instant messaging apps with P2P payment
services.
Payments over Facebook Messenger may also gain
momentum thanks to Facebook Messenger’s huge user
base which is similar to weChat. Apple is also looking
to gain a foothold in P2P payments. Apple lodged a
patent application in 2015 that focused on P2P payments
encryption. Rumours suggest that the transfers could be
linked to Apple’s iMessages.
banks
A key issue that could tip the balance in favour of banks
is security. Six Swedish banks decided in 2012 to leverage
the country’s banking infrastructure to launch Swish,
a P2P payment service which has million users (in
a country of million inhabitants).
other similar initiatives such as Paym
in the united kingdom have achieved
moderate success, having been
used for approximately million
transactions with a total
value of £42million in 2015.
Cross-border
personal payments
“international” or “cross-
border” P2P payments, also referred
to as international remittances
or international money transfers,
represent a very different industry
dynamic. The industry is presently
dominated by Money Transfer operators
(MTos) such as western union and MoneyGram and banks
who have been facilitating payments via bank accounts
across markets for many years.
international remittances are highly attractive for several
reasons:
High Revenue Potential: Remittance service providers
trusted by their customers are able to charge fees as
well as earn foreign currency conversion revenues. Price
comparison sites and many non-profit entities monitor
remittance prices to ensure consumers are aware of what
they are paying but many tend to trust their providers
even if they know there are cheaper alternatives available
Stable Demand: Remittances are necessary and
represent the primary income for families back home.
Many migrant workers live on minimal budgets so that
they are able to send most of their earnings back home
to their families. Even better-off migrants need to remit
funds to pay for mortgages or other obligations at home
Expanded Opportunities: beyond individual
remittances, companies can focus on international
payments that businesses have to send to suppliers in
other markets. These transactions represent higher
transaction values and can be more profitable
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but there are significant challenges that face companies
who want to enter the remittance business:
High costs: Revenues may be high but so are costs.
new entrants soon realise that while they can charge
fees and earn on foreign exchange conversion, the costs
of running a remittance business can be significant. Cash
handling agents (who take cash from senders or pay cash
out to beneficiaries) charge high commissions which
can eat up more than half of generated revenues. The
costs of developing a fully compliant risk management
infrastructure are also prohibitive. Regulations to
mitigate against risk are becoming more stringent and
compliance costs are increasing
Steep penalties: The penalties for non-compliance are
substantial and can drive companies out of business.
A few years ago, a large global bank was fined nearly uSD
$2bn because its internal documentation processes were
inadequate even though there was no evidence of fraud
intense competition: the cash guys
incumbent MTos hold an advantage when it comes to
cash based remittances. The physical agent networks
take a long time to recruit. Agents have to be trained and
monitored regularly. Competition can be categorised into
three tiers based on the breadth of their services:
Tier 1: Giants like western union and MoneyGram rely
on long standing agents ranging from small corner stores
in remote areas to large banks with whom they have
established trusted relationships over many years. They
charge high fees but in exchange they offer speed (often
as quick as 15 minutes) and flexibility (there is likely to
be an agent nearby who is ready to dispense cash to the
beneficiary)
Tier 2: Large companies that tend to focus on specific
corridors – usually the major ones. A well-known
example is DoLex which specialises in the uS to Mexico
remittances, the largest corridor in terms of total
payment volumes transferred
Tier 3: Smaller entities who focus on a single corridor
and usually have a physical presence in migrant areas
Even cash based remittance specialists need bank
accounts so that customers can deposit
cash in a bank branch. but banks, wary
of the risks of non-compliance and the
heavy fines that come with it, have
been closing down bank accounts in
some markets, driving many small
players out of business.
banks
banks mainly deal with
money transfers from one
bank account to another.
Although this is their core
competence, it can take
5 days or more for funds
to reach a foreign bank
account. unlike card
transactions where
global networks such as
visa and MasterCard
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“ ...in the business of
international money transfers
someone and something
unsavoury always gets through
”
exist, there are no international interoperable networks,
to facilitate and automate international bank transfers.
SwiFT, a messaging standards body, covers messaging
between banks, but the actual funds transfer involving
clearing and settlement is done through a complex web
of correspondent banks, dominated by the global giants.
The process takes time and is expensive.
intense competition: currency exchanges
To fill the gap, international currency exchange houses
offer better services, often lower or no fees, and better
exchange rates than
banks. They do not have
widespread agent or branch
networks and often use
local banks to do quick local
bank transfers. in general,
they attract rate sensitive
customers who have cross-
border payment needs (.
to pay for purchase, upkeep
of foreign property or pay
suppliers of their small
business).
intense competition: the new guys
Most start-ups and new players are targeting
account based remittances through creative
mobile apps. Xoom was an early
challenger that focused on key uS
remittance corridors to india, Mexico
and the Philippines. it was successful
by providing immediate credit of
funds transferred by senders (an
innovative feature in a market
where bank transfers take
3 days to clear and settle),
and offering multiple cash
out scenarios. while it
extolled the virtues of its
advanced risk management
systems, it fell victim
to a fraud amounting
to uSD$30 million,
impacting its stock price
in early 2015 (prior to
its acquisition by PayPal), as if to confirm the industry
truism that no matter how much one spends on the risk
management systems, in the business of international
money transfers someone and something unsavoury
always gets through.
Remitly, a Seattle based start-up, is aiming to emulate
the success of Xoom and boasts fellow Seattleite, Jeff
bezos as an initial seed investor. its core focus is on
mobile - offering services through a highly usable mobile
app. in 2015, it bought Talio, a picture messaging app
which has Snapchat-like features. Set-up by ex-Amazon
software developers, it joins a cast of thousands in the
Fintech world who believe
that a combination of three
factors (1) convenient and
slick mobile interface (2)
good customer service, and
(3) competitive pricing, can
disrupt any industry. Like
Xoom it is concentrating on
uS to india, the Philippines,
and Mexico flows – 3
corridors which account for
35% of remittances sent from
the uS.
Another company world Remit, is carving out a separate
business segment of “South-South” money flows (such
as South Asian workers in the Middle East sending money
home) which, according to the world bank, are now larger
than “north-South” flows (migrants in the richer western
markets of Europe and north America sending funds to
poorer countries).
Transferwise and TransferGo are perhaps more well-
known than any of the companies mentioned above
because of the significance and breadth of their
marketing and advertising campaigns, the range of early
celebrity investors, and the general success in appearing
in Fintech and general news on a regular basis.
The international money transfer industry has been the
focus of many start-ups, but the industry has not been
very hospitable to new entrants in the past. new players
hope that a combination of technology and innovative
business models can enable them to capture profitable
market share from industry incumbents in specific
corridors, if not on a global basis.
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Real-Time Payments
In the blink of an eye
Advances in technology are bolstering
innovation such as the internet of Things
(ioT) and autonomous vehicles, which
would have belonged to the realm of
science fiction just a decade or two ago.
This ongoing transformation has raised
consumers’ expectations to the point
where everything related to information
is expected to be available 24/7, in real-
time and on any device.
Translating these expectations to the payments industry
means that any person or institution should be able to
exchange funds with any other party across the world in
real-time and in a secure manner, over the channel of their
choice. Significant progress has been made in specific
areas, but today’s reality is still far from this vision.
The main stay of electronic funds transfers between
bank accounts has been via Automated Clearing house
(ACh) transactions. Early technology infrastructure for
ACH transactions, implemented decades ago, processed
payments in batches and required a few days to clear
and settle transactions. in those days, the internet
was not yet a factor and concerns around security and
privacy were not so critical or public. but end-user
expectations for banking and payment services have
increased alongside the rapid rise of other online and
mobile services. Similarly, security concerns driven by
the frequency of large scale data breaches now feature
prominently in the minds of users and providers alike.
in response, ACh systems have received over the years
many add-ons and new layers to enhance their speed,
security and user experience features. however, the core
design and processes of ACh platforms continued to stay
the same, while the increasing complexity of added layers
has diminished their ability to fulfil the demands of today’s
use cases effectively.
Real-time payments
bank-to-bank real-time payments are not new and have
been in use in Japan since 1973, but widespread adoption
across several markets is only taking place now. A dozen
markets have implemented these since 2001, with the uk,
Mexico and Chile being the more prominent examples
based on the widespread use of real-time payments in
their respective markets.
Today, there are at least 20 additional markets
implementing or planning to implement real-time
payments. Two initiatives in particular bear close
watching: The Fed Payments improvement in the uS and
the cross-border instant payments initiative in Europe.
Together, the uS and European union account for 46% of
the global economy. while they share similarities around
the size and the complexity of linking to thousands
of financial institutions, their regulatory frameworks
follow very different approaches. implementation in
Europe is being mandated, while in the uS it is not. This
lack of mandate in the uS may result in a challenging
environment to generate a much desired ubiquity and
widespread adoption, especially if multiple solutions co-
exist and interoperability becomes an issue.
The solutions implemented in these two regions will
set the standards for future global roll outs. Europe has
decided to adopt iSo 20022, and while solutions in the uS
are still under development, they are likely to adopt the
same standard as well.
“The interoperability between
different payment networks
will grow gradually
”
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beyond speed
while the speed of payments, by definition, is clearly
the key feature of real-time payments, next generation
payment infrastructures promise much more. These
include improvements to other core features including
enhanced security, richer data, improved end-user
experience and network interoperability.
Enhanced security is at the top of the requirement
list for real-time irrevocable transactions. There are
two critical aspects to consider. The user needs to be
securely authenticated, and account credentials need
to be protected both when the data is at rest and on
the move. The concept of a robust user authentication
is evolving from the enforcement of strong password
policies to incorporating a combination of multiple-
factor authentication, digital signatures and the use of
biometrics (. fingerprints, palm-prints, facial and voice
recognition, eye scans, and heart-rate). To protect account
credentials, a combined use of account aliases, directory
services, dynamic tokens, and end-to-end encryption
will become the norm to guard against fraud from data-
breaches. The standards will continue to evolve with time
and will need to balance user experience, with cost and
security. For a more detailed discussion please refer to the
section on security.
Support for richer-data will greatly enhance the value
provided by payment systems to its users by streamlining
processes, enabling advanced analytics and eliminating
the need to reconcile information that currently
travels over different systems. whether it is a real-
time notification of payment, delivery of an electronic
document (. invoice, description of benefits, payroll
slip details, tracking number) or the simultaneous
integration of supply-chain and payment information into
an Enterprise Resource Planning (ERP) system, it is fair to
assume that a great number of transactions will benefit
from enabling a rich bi-directional information exchange
together with the payment transaction itself.
when we consider the development of such a fast and
efficient payment rail and combine that with today’s trend
in opening up payment rails through APis (Application
Programming interface); it becomes apparent quickly that
such a payment system could provide the basis for many
new customer experiences and true innovation that make
good use of its additional capabilities. That is true for
banks as well as Fintech innovators.
Lastly, and key to the success of any payment system, the
interoperability between different payment networks
(domestic and cross-border, closed loop and open loop)
will grow gradually, driven by competition, converging
capabilities and more mature standards. we are likely
to see big differences in speed between the different
markets driven largely by the local payment cultures.
The progressive modernisation and interoperability of the
global payments infrastructure will not be determined
as much by technology limitations but by the ability of
competing financial institutions and other stakeholders
to cooperate and align their objectives in an industry that
tends to be quite fragmented and is regulated differently
around the globe. This cooperation will not come easily
or fast, as the future role of financial institutions as
well as their business models, competitive advantages
The outlook for real-time payments in Europe
> The European payments system should move to real-time
> A real-time payments system will provide merchants a
viable alternative payment rail
> The European payments system should capitalise on SEPA
> Increased fraud is the biggest concern if the European
payments system moves to real-time
> Real-time payments are unlikely for Europe within the
next 3-5 years due to too many roadblocks
81%
75%
7 5 %
46%
3 7 %
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The outlook for real-time payments in the uS
> A real-time payments system will provide merchants a
viable alternative payment rail
> The US payments system should move to real-time
> Increased fraud is the biggest concern if the US payments
system moves to real-time
> Real-time payments are unlikely for the US within the next
3-5 years due to too many roadblocks
> Real-time ACH will lead to the resurgence
tof private label cards
68%
68%
4 4 %
39%
2 9 %
and market shares are at stake. ultimately, it will be the
pressure applied by the innovators against the ability to
resist the revolution by some traditional
players that will determine how the
payments industry will look in a decade
or two.
Timeline of adoption
in Europe, the respondents to our survey
were significantly more in favour of
moving the European payment system towards real-time
(81%) than their uS counterparts (68%). This is likely due to
the longer history of real-time payments in Europe and the
momentum generated by the establishment of SEPA. it is
also due to the strong role both by European and national
regulators to reform and modernize the payment systems.
in the uS, there is still a sizeable majority of respondents
in favour of moving to real-time payments, but the
market is more diverse in its views due to the absence
of a mandate which gives the players more leeway to
make their own decisions. it is likely that there will be
several competing players vying for market share. The
absence of a mandate also places much higher importance
on the question of payment profitability and return on
investment on payment infrastructure projects. it is not
an issue of stopping the real-time payments train that
looks ready to leave the station, but of timing when
to climb aboard in the interest of maximising current
payments profitability versus the future ability to compete
effectively in the digital age.
The most interesting learning from the
responses is that both the uS (68%) and
European (75%) respondents believe real-
time payments will arrive at the merchant
PoS in due course to provide a credible
alternative to existing payment systems. if
successful, pioneer services such as ZAPP in
the uk that provide mobile payments via bank accounts at
the PoS, are likely to trigger similar initiatives elsewhere.
This is likely to revolutionize the global payment landscape
over time.
Lastly, it appears that both uS and European respondents
expect this new world of real-time payments to happen
sooner rather than later. while fewer than 40% of
respondents indicated that real-time payments in both
Europe and the uS were unlikely within the next three
to five years, it would appear from many conversations
since the survey was sent out that this timeline is rapidly
becoming more widely accepted. The European Payments
Council has set targets for late 2017. in the uS the timeline
is less clear-cut, but potential providers have already
launched partial offerings (Early warning P2P) or are
expected to launch first offering end 2016/ 2017 (The
Clearing house). This will be followed by multi-year efforts
to achieve ubiquity.
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Security - Authentication
The price of convenience
in today’s online and mobile commerce
environments, customers struggle with
the frequency with which they are being
asked to come up with new, extended
and increasingly complex passwords
and deal with cumbersome multi-factor
authentication processes. The sheer
number of innovations in payments is
exciting, but while customer satisfaction
is of paramount importance to any
business, security cannot be set aside.
of course, everyone can agree that the industry should
deliver both convenience and security. unfortunately,
these two elements often influence the payment
experience in two different directions. As
pressure increases in the development of
strong and convenient authentication,
regulators and providers are looking
to new technologies, biometric
sensors in particular, for solutions.
Strong authentication
– a regulatory reality
Despite gaining attention around
the world over the past 10-15 years,
strong authentication has long been
a concept without a formal definition.
Since January 2013, when the European
Central bank (ECb) published its final recommendations
for the Security of internet Payments, the concept of
strong authentication has been formally defined within
the European union. As the deadline for implementation
of the Second Payments Services Directive (PSD2) into
national laws approaches, consumer authentication will
become an even more important aspect of the payment
process. PSD2 contains a significant adjustment to the
guidelines for payment service user authentication, with
the purpose of ensuring that payment providers can
confidently confirm consumer identity.
under current plans, providers will be required to apply
“strong customer authentication” whenever an electronic
payment transaction is initiated by a consumer, and
requires the combined implementation of at least two
independent authentication elements:
knowledge-based authentication: something that only
the user knows
Possession-based authentication: something that only
the user possesses
inherence-based authentication: something that the
user is (the most prominent example being biometrics)
These new guidelines are expected to further
accelerate the current migration of
authentication processes away from single-
factor authentication and towards multi-
factor authentication solutions.
Authentication will also be required
to support the open banking and
payments APis currently being
investigated as a precursor to defining
the third party provider (TPP) interfaces
to the banking system, as defined in
PSD2.
Strong authentication continues to be a hot
topic in many markets. in the uS, the Federal
Financial institutions Examination Council (FFiEC)
continues to publish regular online authentication
guidelines in order to reflect the fast evolving nature of
consumer behaviour and security landscapes.
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The security vs. convenience dilemma
Strong authentication in the payments and banking
industry has always been prone to a “security vs.
convenience” dilemma. Consumers are constantly being
presented with new and evolving payment options, from
mobile wallets to wearables, by a wealth of providers
(., Apple, Google, Samsung, venmo and Stripe to name
a few). The drive to deliver innovative and convenient
payment solutions is intriguing, but also typically plagued
with new security vulnerabilities.
As security measures continue to become more
sophisticated and complex alongside an almost constant
drive to deliver a seamless and positive experience for
consumers, there may be conflict between the direction
in which the industry is heading and the one where
regulators wish to guide it.
banks and other financial institutions have continued
to employ a range of products that offer many levels
of security. They face a real challenge in today’s
environment that goes beyond providing additional
complex authentication and security layers. Customers
need to be able to complete their transactions or banking
needs securely, while being able to avoid having multiple
barriers put in their way.
The impact of new guidelines by financial service
regulations on transactions of both European union and
non-European union consumers could be significant,
requiring providers that are regulated in the European
union to change their customer authentication
procedures in order to comply. These changes may be
extended to cover all customers in order to maintain a
consistent customer experience.
Passwords
our use of passwords in today’s society is critical. we
log in to dozens of systems and services every single
day. According to a study from uk organisation Cyber
Streetwise, an average person must remember 19
passwords on a regular basis, spread between their
financial passwords, social networks and e-commerce
activities amongst other things. As the number of online
services continues to increase along with the complexity
of security, users are prompted to create or change
passwords on a continuous basis.
Authenticating consumers quickly and securely has
become a frustrating but critical requirement for all
industries – none more so than for financial and banking
institutions. with new multi-factor authentication
standards, the challenge will be how to guarantee security
and compliance without jeopardising the customer
experience.
biometrics and smartphones
The world has long been fascinated by the concept of
biometric technology. Movies such as James bond and
Minority Report have hinted at a society where our
inherent physical characteristics are fundamentally linked
to our digital identity. These technologies are certainly
not new. however, what has long been a slow and
gradual evolution has reached a tipping point. your face
or fingerprint, iris or even heart beat could be used to
authorise payments.
Given the prevalence of smartphones that natively
support biometrics and push notifications, there is an
opportunity to finally provide a secure and convenient
experience, not just in the financial industry but also in in
e-commerce and social networks.
The core feature of using a mobile device as an
authentication channel is that consumers can authorise
a transaction with a single tap of their phone, enabling a
secure authentication and providing a significantly better
user experience.
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As smartphones continue to become powerful tools for
delivering financial services, their use in authentication
is expected to increase. banks and other service
providers are investing in and experimenting with various
technologies in order to improve payments security and
the use of biometrics is becoming increasingly common.
According to research conducted by Gartner, 30% of
mobile devices will use biometric authentication in 2016.
industry expectations and trends
This year’s survey respondents recognise the potential
for biometric technologies with 82% indicating that they
believe biometrics will become mainstream, although
there are concerns that implementation and adoption will
take time. Respondents identify authentication as a core
use of biometrics with 79% indicating that it is likely to be
used as an additional security layer.
while other biometric authentication options have yet
to achieve significant adoption, the use of fingerprints
is becoming commonplace. Fingerprint authentication
is moving into the mainstream with the introduction of
Touch iD in Apple handsets and its integration into Apple
Pay in 2014. other providers, such as Samsung Pay, have
also put fingerprint biometrics at the centre of their
payments play.
while the popularity of using fingerprints for
authentication is growing, there are ongoing discussions
around the true level of security provided. Security
researchers have demonstrated that they are able to
replicate fingerprints in order to fool technologies such
as Touch iD into giving a false positive identification.
Despite these flaws, the reality is that consumers have
taken to these technologies. Adoption is on the rise
and availability continues to grow as multiple device
manufactures are embedding the technology into their
smartphones.
The Fast iDentity online (FiDo) Alliance, a non-profit
organisation founded in July 2012, comprising companies
such as Google, visa, MasterCard, PayPal, bank of America
and Microsoft recently published its final specifications on
how to “kill” the traditional password. The FiDo Alliance
has a focus on leveraging existing biometric capabilities,
particularly those already available in mobile smartphone
devices, such as voice recognition and fingerprint sensors.
banks around the world are beginning to adopt
fingerprint technology in order to authorise payments
via smartphones and development is underway to
deploy iris detection in front-facing cameras. Fujitsu, for
example, is developing iris scanning capabilities for future
phones. A number of banks have already introduced voice
recognition systems in their telephone banking services,
which verify customers based on their speech patterns.
Systems such as these will again deliver the security
and convenience that customers require – using similar
systems, customers will be verified as they speak with a
representative, reducing the overall authentication time.
The benefits and concerns of biometrics
> Biometric technologies will become mainstream in the
future but implementation and adoption will take time
> Biometric technologies will be deployed as an additional
layer of security to tokenisation and EMV
> Biometrics can bring benefits such as ease of 'card not
present' transactions and no need for a physical wallet
> Data privacy is a major issue with biometrics
> Cost of implementation is a major issue with biometrics
> Current level of security, which is perceived as too low, is
a major issue with biometrics
82%
79%
7 8 %
72%
69%
5 8 %
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Corporate Payments
Facilitating trade
Electronic payments are becoming an
increasingly important component of b2b
commerce. Optimising payments enables
businesses to solve some pain points,
such as the reliance on manual processes,
the lack of visibility, cash flow issues
and the costs involved in processing
transactions. Many businesses also
focus on optimising payments in order to
automate processing practices, improve
data reporting, and increase controls and
potentially revenues.
identifying internal pain points
and understanding business needs
Feedback from buyers (corporations, SMEs) and sellers
(b2b merchants) indicates that there are some internal
pain points and business needs to overcome and address
when designing innovative solutions in payments, which
may vary by payment method.
Pain points for buyers Pain points for sellers
> Slow, manual and inefficient processes
> Low acceptance of appropriate payment methods
(. no local payment methods acceptance), including
online payment methods
> Lack of control and transparency over expenses
(. concerns about employee spending)
> Lack of comprehensive fraud prevention solutions
> Reconciliation of business expenses being time-consuming > Manual processes to authorise, capture
and reconcile transactions
> Absence of appropriate solutions for SMEs > Basic data and tailored reporting
> Costly solutions (. card surcharging, etc.) > No automatic data and financial reconciliation
> Current procedures non-compliant with internal policies
(. travel policies)
> Lack of smooth flows for real-time payments, etc.
> Lack of data and tailored reporting
1. Examples of internal pain points
“A few non-bank payment
providers are targeting
businesses
”
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The shifts in payments
adoption and acceptance
buyers and sellers are increasingly looking to adopt and
accept innovative payment solutions. The buyers’ aims
when adopting new payment methods are decreasing
costs, facilitating the purchase process and optimising
internal practices. For sellers, payments have also
become strategic to reduce costs and optimise processes
as well as to increase revenues. Traditional payment
methods, . paper cheque, plastic credit cards, etc. have
been used – by the buyers – and accepted – by the sellers
– in the b2b space for decades. while the trends clearly
differ across countries, the shift towards electronic and
automated commercial payments is undeniably global.
On the buyers’ side
b2b payments adoption and growth vary by market
and sector. b2b payments encompass a large range of
products such as commercial cards, bank transfers, direct
debit, cash and cheque.
Specifically, commercial cards represent a category of
card products used by buyers to pay for various goods and
services related to their business, especially for travel and
entertainment (T&E) expenses. The use of commercial
card solutions is evolving and has grown mainly amongst
corporations, and to a lesser extent SMEs. Large
corporations recognise there are benefits associated
with these solutions such as faster processing, tighter
monitoring, automated expense reporting and financial
benefits obtained from cards issuers. Therefore, issuers
of commercial cards continue to focus on capturing T&E
spend, although many are recognising the opportunities
to capture a greater variety of b2b spend.
Commercial cards encompass a number of products with
different functions.
Corporate and business cards are commonly used to pay
for T&E expenses such as hotels, taxis and flight tickets.
‘Procurement’ departments mainly use purchasing cards
to pay for b2b purchases. Corporations are progressively
moving away from physical to digital solutions – from
plastic to virtual products
issuing payment providers have further developed their
solutions to provide more digital products. Therefore,
Buyers payment needs Sellers payment needs
> Electronic payment and invoicing (or e-invoicing) > Easy and fast checkout, . 1-click
> Payment controls and flexibility > Visibility on cost of accepting payments
> Real-time payments
> Offer value-added services (. DCC offering)
> Integration with internal systems (. ERP, accounting) > Fast processing of payments and increased cash flow
> Cost-effective and improved cash flow
> Secure payment solutions
> PCI DSS compliant payments and for all sales channels
> High level of security (. tokenisation)
> Easy payment and invoice reconciliation systems > Accepting large range of traditional and alternative payment
methods, via various channels (. online, EDI, etc.)
> Competitive foreign exchange rates / transparent rates
> Better data and customised reporting
> Better reconciliation, enhanced data and customised
reporting, etc.
2. Examples of key payment needs
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there has been a growing demand for lodge accounts
(. AirPlus Company Account) and virtual cards
(. wEX, enett single use cards), allowing corporate
clients to control and optimise better their travel budgets
b2b card industry has also seen an increased usage of
private label / closed-loop payment methods, such as
fuel and fleet cards, issued to businesses by independent
operators (. Fleetcor, DKv, etc.) and oil companies
(. Total, Aral, etc.)
There is also a rising interest in other products amongst
corporate clients. Commercial debit and prepaid cards
appear to be gaining traction in markets such as the uk
and italy, especially for large companies (. a rising
demand for prepaid cards, mainly for T&E and payroll to
better manage business expenses)
On the sellers’ side
A large number of b2b merchants do not have a clear
understanding and knowledge of payments; there are
some opportunities for providers to help sellers in this
space, as payments have become a strategic component
of their business.
Today, these merchants accept ‘standard’ payment
methods, such as bank transfer, direct debit, cash and
cheque. Payment acceptance policies can vary depending
on the market. Due to several factors mentioned earlier,
merchants are increasingly accepting (or planning to)
additional payment methods such as credit/debit cards
(with international and domestic payment schemes),
purchasing cards, direct banking, local payment methods.
Similar to buyers, sellers perceive the benefits of accepting
cards such as the capability to accept payments online,
faster processing, improved reconciliation and invoicing,
processing by handling (requiring fewer resources). with
the increase of e-commerce, in b2C and progressively in
b2b, a number of merchants are increasingly willing to
develop a comprehensive online payments strategy. b2b
merchants are starting to develop a payment acceptance
policy to define which payment methods to offer, .
accepting alternative payment methods, for which
segments of the client base and for which channels, etc.
what is the future of commercial
or b2b payments?
Four key trends have been identified:
bank transfers will gain traction amongst SME segment
Corporate mobile banking will become a must-have
offering for banks
Real-time payments will be a critical component
Cheques still have a future in b2b
1. bank transfers
As shown in the chart below, an overwhelming majority of
the respondents think that bank transfers will be widely
adopted by SMEs in the near future. 83% of the sample
agrees that bank transfers are typically used by larger
businesses, but will gain traction amongst SMEs in the
next 3-5 years. The shift towards globalisation is pushing
SMEs into a more complex environment.
The future of commercial/ b2b payments
> Bank transfers are typically used by large businesses,
but will be widely adopted by SMEs in the next 5 years
> Due to rising demand for corporate mobile banking,
banks must offer such services within the next 3-5 years
to stay relevant
> Real-time payments will become the standard for B2B
transactions in the next 3-5 years
> Paper cheques will continue to be used in the next 3-5 years
> Virtual cards will surpass plastic cards in the next 3-5
years due to lower risk of fraud and misuse
83%
80%
7 7 %
63%
3 7 %
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As SMEs become global, they have to adapt their treasury,
cash management and payment strategies. They are
therefore increasingly using the services offered by banks
to send and receive international payments,
which can be costly.
banks have traditionally offered b2b
payments to large corporations and
more recently to SMEs. however,
alongside with globalisation,
industry structural changes and
increasing competition, as well as
disruption from new technologies,
banks are being urged to develop
alternative and innovative solutions
to address b2b players’ needs, as
new entrants have already begun to
target some markets. A number of non-bank
payment providers are targeting businesses, including
those which are not currently being serviced (or not fully)
by traditional banks, . SMEs looking to increase their
international footprint.
Earthport, providing cross-border electronic payment
services, launched its first compliant gateway for real-
time payments in August 2015. by simplifying the cross-
border payment system, its network gives businesses
transparency into costs and settlement time to transact
internationally.
Currency Cloud, a company based in the uk, allows
businesses to offer their customers’ access to foreign
exchange through a simple APi that links to Currency
Cloud’s cloud service. The company effectively competes
with banks to win business from financial services
companies whose business is to transfer and exchange
money for others (individuals or other businesses).
2. Corporate mobile banking
The 2013 survey results indicated that the main uses
of mobile devices for businesses in terms of alerts
and messaging, account monitoring and workflow
management are all seen as highly relevant. This year,
80% of the respondents agreed that banks must offer a
corporate mobile banking solution due to rising demand
from corporates and small businesses. The usage of
corporate mobile banking is gaining traction amongst
businesses though the adoption is slower than in the
b2C space, because of the lack of offerings and security
concerns.
3. Real-time payments
Real-time payments is becoming a ‘buzzword’ in both
b2c and b2b worlds, and for buyers and sellers globally.
by accessing products and services offered
as ‘real-time’, businesses would have a
better experience with simpler and
faster processes, cost reductions and
transparency amongst other benefits.
Respondents even believe that real-
time payments solutions will not be a
differentiator in the near future since
they would become ‘a must-have’. 77%
of the sample surveyed agreed that
‘real-time payments will become the
standard for b2b transactions in the next 3-5
years’. however, offering real-time payments
represent a challenge for banks as the costs related
to the investment in real-time infrastructure can be
significantly high.
4. Cheques
Cheques will not be ‘checked-out’ by businesses.
They are still widely used and accepted for payments
in countries such as the uk, France and the uS. while
there is a decline in cheque volumes, they continue to
form a vital part of the payments landscape, especially
amongst businesses and other organisations (. for
charities, cheques are the primary payment method).
This trend will potentially remain since 63% of the survey
respondents believe that paper cheques will continue to
be used in the next 3-5 years.
Continuous evolution
The world of b2b payments is evolving at a fast
pace. businesses, both from the buyers and sellers’
perspectives, are looking for new b2b payment initiatives
in order to increase controls, efficiency, security,
compliance and reduce costs. it is expected that banks,
‘fintechs’ and payment technology companies will
increasingly partner to offer digital solutions to improve
the entire process of using or receiving payments. The
trend towards electronic means of payment is clear,
although it is still complex to predict exactly how
electronic payment methods are likely to evolve in the
long term.
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Financial Inclusion
The work is far from over
Everyone needs access to banking and
financial services, regardless of their
economic status or geographic location.
however, a surprisingly large number of
people, especially the disadvantaged and
low-income segments, are excluded from
the formal financial system.
According to the world bank, 38% of the world’s adults
are unbanked and only 4% indicated that they do not need
an account. This situation is even more unfavourable in
developing economies where 59% of adults do not have
a bank account. The Gates Foundation states that this
number increases to 80% among adults living in extreme
poverty. Account ownership varies drastically market
by market, providing insight into the prevalence and
complexity of financial inclusion.
For financial service providers, these consumers may be
too risky to serve with limited profit potential. Existing
financial service products are not suitable for many
consumers because of the nature of these products.
For example, minimum balance requirements for deposit
products are restrictive and exclude the poorest customer
from having an account.
in addition, there are often limited ways to get credit,
especially for consumers who have insufficient credit
history. Many consumers across the world use cash
for many aspects of their household finances as a
result. Physically carrying cash for making payments
is enormously inefficient and fraught with security
concerns.
Excluding consumers from traditional financial services
limits the prosperity and growth of individuals, families,
communities and local economies. Financial inclusion
is about more than having a bank account. it allows
everyone the choice and access to financial service
products that digitise cash and create an efficient
ecosystem to facilitate payments, money management,
savings, loans and investments.
nonetheless, financial service organisations understand
the situation and are exploring ways to address it within
the markets in which they operate. Potential solutions
include creating new products that use the existing
financial services ecosystem in-market, redefining the
financial services ecosystem or even developing new
elements of payments infrastructure. The definition of
financial inclusion is not the same across all markets after
all, since individual market structures differ dramatically.
Account Penetration
Adults with an account (%) , 2014
South Asia Sub-Saharan
Africa
East Asia
& Pacific
high-income
OECD
Econmies
Latin America
& Caribbean
Middle East
Source: Global Findex database
Europe
& Central
Asia
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united States
Some financial institutions in the uS are addressing
financial inclusion needs by creating new products that
operate on existing payment infrastructure. For example,
the Mission Asset Fund is formalising the “rotating
savings and credit association” (RoSCA) models seen
in emerging markets for informal lending and savings
circles. They do this by providing an environment for
lenders/ borrowers to come together and partner with
traditional banks to create personal accounts for each of
the members within the circle.
Fintech providers (such as Lendup, ZestFinance, vouch)
are using alternative data to underwrite loans for
consumers who would otherwise be denied credit and
would have to resort to payday loans, pawn shops or
other informal borrowing. Most, if not all lenders report
to traditional credit bureaus, which create credit data and
help improve consumers’ credit score, thereby helping
consumers gain access to other products within the
system.
Meanwhile, other institutions are redefining the financial
services ecosystem both at the product and distribution
level:
Product: in the uS, financial products traditionally have
been offered in product silos within traditional banks.
Some financial institutions are breaking down these silos
and putting teams in place to create product suites that
are tailored for underserved consumers in their markets
(such as Regions Financial “now banking”). Further,
general purpose re-loadable (GPR) prepaid cards in the uS
do much more than just store value; they are being used
by consumers as transaction accounts and have much of
the functionality and services of bank accounts, including
direct deposit, bill payment, savings feature, and other
services. Companies like ingoMoney, which has its roots
in risk scoring for cheque cashing (previously Chexar), are
providing remote deposit capture on GPR cards to offer
consumers an alternative to cashing a cheque and paying
a high fee for the privilege
Distribution and supporting infrastructure: Retail
establishments such as walmart and kmart have been
growing in popularity for financial services including
cheque cashing, remittances, and other financial service
products. Convenience stores are being used as cash-
acceptance points for utility payments (. PaynearMe
DEVELOPED
Predominant use of
electronic payments
with highly banked
population
Examples: countries in
Europe, Canada, Japan
Exception:
united States where
significant portion of the
market operates outside
formal ecosystem
MIDDLE GROUND
Massive populations with
consumers across social and
economic stratification, with
varying degrees of inclusion
Examples: india, China
EMERGING
Less developed in all
aspects. heavy use of cash.
Less bank prominence.
Examples: South Asia,
Middle East, Africa
“General purpose re-loadable
prepaid cards do much more
than just store value
”
Range of development of the financial service ecosystem by market
F0cus Area
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solution at 7-11 convenience stores). FiCo has also
developed and is testing a credit risk score based upon
alternative data such as utility payments and other
publicly available information. The use of this new model
has the potential of credit scoring millions of otherwise
‘un-scoreable’ consumers, thus enabling access to loans
and financial services in general
initiatives that seek to develop new rails within the
ecosystem in the united States are in very early stages
such as The Merchant Customer Exchange (MCX), a
merchant-owned mobile commerce network, but have not
yet gained traction.
Emerging markets
Many innovative payments solutions that are created now
are built on existing payments infrastructure. Mobile
operators and telecom networks in some developing
markets, where high percentage of households live in
poverty and operate almost entirely with cash, have taken
the lead in financial inclusion. They leverage their huge
user base, brand and reach to connect financial products
offered by banks to their customers. Examples include
Smart Money in the Philippines, Tigo in Africa and South
America, and of-course M-Pesa is highly successful
in Africa.
M-Pesa has over 20 million customers. it is taking
a step further in extending its range of core services
– . facilitating payment services through the mobile
channel - to offerings loans and savings products.
The success of M-Pesa may be due to several factors, such
as an extensive (over 85 thousand) and incentivised agent
network, the security of not carrying cash around, and
the continued commitment of the board of Safaricom,
the mobile operator behind the success of the mobile
payment system.
The majority (69%) of this year’s survey respondents
believe that new competitive payment products will
emerge via alternative payment rails. This is more evident
for respondents from emerging markets (77%) compared
to developed markets (68%). increasing competition on
payment rails will lead to market expansion and improved
financial inclusion.
An eye towards the future
Financial inclusion is a crucial aspect of economic
development for most countries across the globe.
Although much has been done to increase financial
inclusion, there is still much more to do. EDC’s survey
respondents believe that specific requirements are
needed to drive further financial inclusion.
Innovation, partnerships, and collaboration:
while Fintech start-ups are nimble enough to address
the financial inclusion needs of underserved consumers
through innovation with the use of big data, new tools
and technology, they rely on traditional banking
infrastructure. Meanwhile, traditional Financial
institutions are attempting to keep up with well-funded
start-ups but because the uS is a highly regulated
environment, oversight into bank soundness and
consumer protection is paramount and this has limited
bank innovation to some degree. banks are therefore
also looking at ways to benefit from Fintech innovations.
in emerging markets, innovations and partnerships with
brick-and-mortar stores or players with large and loyal
user bases are key to increasing current levels of financial
inclusion
Government support / alignment: Government and
regulation plays a critical role in sustaining consumer
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trust and faith in the system. Potential changes in
written regulations have an undeniable impact on the
products and the market as a whole. Governments in
developing markets could play an even more significant
role in increasing financial inclusion by digitising cash
and supporting digital financial products. According
to the world bank, 20% of unbanked adults (over 400
million people) receive government payments (wages or
benefits) in cash. 79% of the survey respondents believe
that regulators/central banks will play an increasingly
active role in the shaping of innovation and competition.
Survey respondents also supported the potential role of
international regulation (versus regulation at a region,
market, or local level) as well as regulation over non-bank
providers. national identity systems are also viewed as
critical in driving financial inclusion within markets
Education of stakeholders: Service providers must
be educated that profit is possible and consumers
must understand the value proposition compared to
alternatives. Product choice and access will not fix
everything. Providers need to educate the users of their
products and services in a responsible way and should
start with the young (., EverFi offers financial service
products to financial institutions as well as schools)
Customer-centric product and channel design is
economically favourable compared to other options.
Consumers need to identify with the financial service
provider and feel trust and relevance with the product.
The customer experience has to be one that supports
these perceptions, and one size does not fit all
behavioural economics principles are being used and
tested to see if customer behaviour and choice can be
influenced by product and access channel design (.,
PayPerks). Developing new layouts of physical financial
service branches will also be critical to make the consumer
feel welcome and provide an experience that he/she
values
Access channels: Mobile is a low-cost channel that has
further reach compared to traditional bank distribution
channels. Respondents from developed markets more
strongly agree that mobile payments have been successful
to-date and will continue to grow rapidly for proximity
payments compared to emerging markets (69% vs. 54%).
As an access point, mobile is not the only solution. Cash
conversion points at places like retailers, grocery stores,
convenience stores and kiosks in markets where cash
is king can potentially influence the adoption of new
services and boost financial inclusion
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Virtual Currencies
& Blockchain - Digitising value
virtual currencies, also referred to as
artificial or digital currencies, have been
around for more than a decade. They
are electronically created and stored.
Like fiat currencies, they are a media of
exchange for goods and services, but
their values are often controlled by their
developers and their acceptance may be
limited to certain communities such as
specific online games or social networks.
Examples of virtual currencies include
airline reward points, Amazon coins,
Facebook credits (although they no
longer exist), and Clash of Clans gems,
amongst others.
bitcoin is a form of virtual currency but is more unique
than other currencies because it is open-source and
decentralised. bitcoin was first introduced in 2009 as
a “distrust” model, where collective verification of
transactions was required. it uses cryptography to
control its creation and management by independently-
owned computers (. miners) participating in the
network so no single entity can influence the currency
value. The goal was to create an alternative to cash and
remove capital control from the government and central
banks. Currently, the use of bitcoin is dominated by
exchange trading, with retail adoption largely restricted
to niche demographics. however, it has been gaining a lot
of momentum in developing countries.
in Argentina, for example, bitcoin helps to circumvent
the government’s restrictions on receiving money from
abroad. The government has forced banks to set dollars
at artificially low rates in a bid to control inflation. in
March 2013, the government set the exchange rate at 5
pesos per uS dollar but anyone could trade a dollar bill
for 8 pesos with one of the money changers on the street
(according to the ny Times). Merchants who accepted uS
The greatest potential seen for bitcoin
> As a mean to maintain anonymity
in the online payment process
> As a medium of exchange in developing countries
> Sending remittances
> Making online payments
> As a financial investment
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Virtual Currencies
& Blockchain - Digitising value
dollars were therefore losing money when they converted
their dollars into pesos with their banks but they were
able to receive fair value from bitcoin transactions.
while bitcoin has gained numerous advocates since its
inception, it has been facing a mountain of scepticism.
A big concern that consumers have is the volatility
of its value (. one bitcoin was worth over
$1,100 in late 2013, then $200 in 2015 but
has regained value to over $400 in early
2016). Also, bitcoin is not trusted by
the financial community, who view
it as an unregulated and inherently
risky digital currency. its on-going
problems with illegal purchases
and money laundering certainly do
not help its reputation and aspiration
for mainstream acceptance. when
asked where do you see the greatest
potential for bitcoin, more than half of this
year’s respondents see it simply as a means to maintain
anonymity in the online payment process. Only a small
portion of the participants see its potential as a medium
of exchange in developing countries, as a financial
investment, or as a tool for sending remittances and
making online payments.
There are apparently opposite views of where bitcoin is
headed but it is almost certain that the digital currency
will not be able to gain widespread acceptance in the near
future. yet, in the short-term, the technology backbone of
bitcoin – blockchain – presents myriad opportunities in a
range of industries and has captured significant interest
from the media, entrepreneurs and financial institutions.
So what is blockchain?
blockchain is a distributed ledger or verifiable record of
digital transactions, similar to a database but with public
visibility of only part of the information. A private key is
required to unlock and sign a transaction. There are two
main types of blockchain: public and private. A public
blockchain is an open and decentralised ledger, owned by
no-one but shared and updated by a consensus of miners
in the network.
These miners use ‘Proof of work’, or complicated
mathematical calculations, to prove that a transaction
is valid and cryptographically chain every block of
transactions to the previous one. As a result, each block
is permanently added to the blockchain in a linear and
chronological manner. The benefit of this is that once
a digital event is entered into the blockchain, no-one
can change or delete any of the records, thus leaving a
trustworthy audit trail.
on average, transactions are confirmed by the
network within 10 minutes. in addition,
decentralised consensus makes tampering
very difficult because confirmations from
several independent miners are required
for a transaction to go through. it also
removes the need for an intermediary
and avoids a single point of failure,
which provides major cost and
efficiency benefits.
A private blockchain is owned and
operated by a group of authorised players.
The transaction processors are trusted
partners, which probably makes it more attractive to
businesses, financial institutions and regulators that are
sceptical of the public distributed ledger or concerned
about security and privacy controls. Several major global
financial institutions including but not limited to barclays,
banco Santander, Citibank and Goldman Sachs are already
investigating blockchain technology for a wide variety
of applications (. to speed up transaction processing,
reduce operating/infrastructure costs, eliminate
deficiencies, improve transparency, etc.).
in future, it may be possible that banks and other financial
institutions will operate their own private blockchains.
Since financial institutions operate in a heavily regulated
environment, these private blockchains will still need to
satisfy all the regulatory requirements.
Financial use cases
Any asset can theoretically be transferred electronically
using blockchain technology. while current systems
are already capable of tracking and verifying a digital
exchange, blockchain presents the benefit of doing it
in near real-time. A majority of respondents (over 80%)
believe there is great potential for blockchain in financial
services. More than half believe blockchain technology is
likely to disrupt the financial services industry by making
existing processes more secure, inexpensive, efficient and
transparent.
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below are several potential financial use cases:
Money transfer: the potential is obvious. The
areas around cross-border payments especially
business-to-business (b2b) payments and peer-to-peer
(P2P) remittances involve many inefficiencies. The
infrastructure is outdated and the process is slow and
expensive. blockchain offers a new approach by removing
the intermediaries, which makes the process faster and
potentially more cost efficient. Align Commerce, a San
Francisco-based start-up, is using blockchain technology
to improve the cross-border payment process and reduce
transaction fees for small businesses
Stock exchange: the idea of trading and settling
stocks based on blockchain may soon become a
reality. According to wired, the Security and Exchange
Commission (SEC) in the uS has recently approved internet
retailer to issue company stock via the
blockchain-based technology separate from shares traded
on the nasdaq. however, even nasdaq is looking at ways
to use blockchain in its pre-iPo trading arm, nasdaq
Private Markets, and has used blockchain to transfer
shares for the first time in Dec. 2015
Asset and collateral management: the traceability
and immediate nature of transaction processing on the
blockchain can tackle inefficiency and reduce fraud in
asset and collateral management. The distributed ledger
can verify and maybe even execute the contracts between
parties under predefined conditions. Financial institutions
are exploring opportunities in this area
The use cases mentioned above are by no means
exhaustive. The numerous potential applications of
blockchain have stimulated tremendous interest in the
financial services sector globally. Santander claimed
there are 20-25 use cases for blockchain with the focus on
international payments and smart contracts. it estimated
that the technology could reduce banks’ infrastructure
costs attributed to cross-border payments, securities
trading and regulatory compliance up to $20 billion per
year by 2022.
other Financial institutions are jumping on board. ubS
set up a research lab in London, focusing on areas such
as payments, trading and settlement, and smart bonds.
Goldman Sachs, bnP Paribas and inG bank are exploring
ways the blockchain can improve faster transactions and
business processes. Rabobank, westpac, AnZ bank are
partnering with Ripple to investigate the potential use
cases of blockchain. visa is also working on a proof-of-
concept for a blockchain-based remittance service and
suggests that the blockchain is “no longer a choice” but
“something the industry has to live with”.
non-financial use cases
Although the blockchain is a leading-edge technology
with great potential to disrupt the financial services
industry, it is not specific to financial use cases. while the
distributed ledger technology is on its rise to the peak of
the hype cycle, many start-ups have emerged with promise
to solve numerous non-finance related problems. For
example, Ethereum, a decentralised platform, runs smart
contracts. Factom is working on a system that secures
and proves the authenticity of records that are embedded
on the blockchain. Another start-up, Everledger, provides
permanent and immutable records of certificates and
ownerships of diamonds.
The most prominent examples of non-financial use cases
can be grouped into the following categories:
The potential for distributed ledger technology such as a blockchain
> More financial institutions will invest in blockchain
technology to trade and transfer financial assets
> Blockchain technology will drive the creation of new
payment products and services
> Blockchain technology is likely to disrupt financial services
by making existing processes more secure, inexpensive,
efficient and transparent
> Blockchain technology has no future in financial services
but may have a future with other assets (. contracts)
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Proof of ownership and asset transfer: title or
ownership of insurance policy, home, auto, land, and any
other physical or intangible assets can be transferred
using the blockchain technology. The current process
is complicated and often requires more than one third
party involvement to check the history of that property,
verify ownership and prepare legal documents before
a transaction can take place. Depending on the type
and size of the asset, the process may take up to several
months. blockchain may be the solution for this problem
by eliminating the intermediaries and speeding up the
transaction. Start-ups such as Colu and bitproof are
looking at ways to achieve this goal. bitproof allows users
to certify documents and prove their ownerships. Colu is
digitising ownership of properties such as ticketing, music
rights and car iD through the blockchain
Smart contracts: the idea of smart contracts is to
have transactions automatically executed under the
negotiated terms and predefined conditions between
the stakeholders without the involvement of a central
intermediary or counterparty agent. For example, users
A and b can create a contract such that A will pay b $x on
a certain day if a specific goal or condition is met (. a
service provided by b was marked as complete, the value
in b’s account is below a certain level, etc.). Depending
on the outcomes, money can be sent to b under the right
conditions or remain in A’s account. This happens without
the need for a third party to trust anyone. The lack of
third party interference will increase the efficiency of
the process and remove the risk of any discriminatory
effect. Many companies are exploring ways to make this
a reality. Ethereum, a start-up, is focusing on running
smart contracts on its platform. Samsung and ibM are
partnering with Ethereum to test the concept of smart
contracts with the internet of Things
Identity management: as fraud has always been a major
concern for commerce and even government benefits or
documents, the ability to authenticate the identity of an
individual and prove the existence of a thing will save both
the private sector and government significant amounts
each year. blockchain may be the ultimate solution to
this problem. if expectations are met, blockchain could
introduce a whole new digital world with records (.
health records, voting records, marriage licenses, personal
identification such as passports, driver licenses and other
government documents) that can be cryptographically
proven to exist and belong to a certain individual. The
most important factor is that these records are reliable
and undestroyable, which help eliminate fraud and
corruption
Future of blockchain
blockchain is still in its infancy, and the technology is
unproven. People in the industry have different views on
how the technology will develop in the future. Some think
public or private blockchains are solutions to problems
that the government, financial institutions and enterprises
are trying to solve (. reducing iT management costs,
facilitating cost-efficient transactions and etc.). others
argue that blockchain cannot be separated from bitcoin
and think it is impossible to run an independent blockchain
without using bitcoin as a store of value and then the
digital currency may hinder the disruptive impact of the
technology.
while there are different speculations on the blockchain
technology, its future will ultimately depend on how all
those start-ups and established companies investing in
the technology can successfully deliver the promised
applications. Then of course, to achieve widespread
adoption, it will take time until consumers, businesses and
government institutions accept the decentralised nature
of the technology.
More financial institutions are expected to invest in the
distributed ledger technology whether for trading and
transferring financial assets or other applications. The
blockchain is expected to make payment transactions
faster, cheaper and more secure, and it is certainly seen
as one of the most exciting technologies in today’s world
that can help drive the creation of new payment products
and services in the future.
The ability to authenticate the identity of
an individual and prove the existence of a
thing will save both the private sector and
government significantly each year
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The Internet of Things
Towards connected commerce
The internet of Things (ioT) is the
interconnection of uniquely identifiable,
smart (contains chips) consumer objects
and industrial equipment via the internet.
it enables information to be collected
and communicated between objects and
users passively or dynamically. while there
were only a few billion connected things
in 2014, many industry reports estimate
that this number will reach 25 to 50 billion
by 2020.
There is no doubt that ioT will grow rapidly and spread
across industries over the coming years. 93% of this year’s
respondents think that ioT will find applications in nearly
every field (. connected cars, homes, wearables,
healthcare, agriculture, energy, etc.). 85% think that ioT
is about smart sensing everything around us, which will
ultimately change the way we live, shop and pay.
ioT can be separated into two pillars: Consumer vs.
business.
Consumer ioT – if the connected objects or “things” are
for consumer uses (. for personal convenience)
business ioT – if the connected objects or “things” are
for business uses (. to reduce costs or improve business
operational efficiency)
Consumer ioT
There are three main segments under Consumer ioT:
wearables, connected home and connected cars. within
each of those segments, there are an unimaginable
number of potential use cases that enable near real-time
information sharing and new payment opportunities.
Wearables are smart accessories, including
smartwatches, fitness trackers, smart clothing and smart
jewelleries. Although they are still in the early phases of
adoption, fitness tracking is the leading consumer use
case for wearables. however, more and more of the newer
generation of wearables have begun to offer payment
applications. For example, Apple watch works with Apple
Pay, the e-wallet Pebble works with both Apple Pay and
Android Pay, bellamy’s Swatch watch works with China
union Pay, and Xiaomi wristband works with Alipay.
Jawbone added American Express cards to its fitness
trackers, allowing users to pay for groceries and other
The impact of the internet of Things
> IoT finds applications in nearly every field (. connected
cars and homes, wearables, healthcare, agriculture,
energy, etc)
> IoT is about smart sensing everything around us, which
will ultimately change the way we live, shop and pay
“ioT will ultimately
change the way we live,
shop and pay
”
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The Internet of Things
Towards connected commerce
items after jogging. Disney’s Magicband allows users to
unlock the door of their Disney Resort hotel room, enter
theme and water parks, charge food and merchandise
purchases to their Disney Resort hotel room during their
hotel stay.
Many financial institutions are exploring opportunities
with wearables. Just to name a few - Caixabank and
barclays are testing bank-issued bracelets for contactless
payments at merchants. RbC is testing a wristband that
authenticates via user’s heartbeat in Canada. insurance
companies are using telematics to monitor consumer
driving behaviour and adjust their premiums accordingly.
MLC, a life insurance company in Australia, is providing
rebates on health insurance depending on the consumers’
level of physical exercise based on the record from their
smartwatches.
Connected home means electronic devices in the
home that can be monitored, managed and controlled
by a smartphone or tablet. They can also automatically
transfer information to other connected objects and
generate transactions without human interferences. For
example, nest Thermostat allows users to control heaters
from anywhere, routinely turns on/off according to the
users’ schedules and automatically adapts to seasons
change. Some home appliance players are expanding
the value proposition of their products by integrating
payment and creating innovative services for their
consumers. For instance, Samsung refrigerators allow
users to order and pay for groceries through a MasterCard
shopping app. Amazon Echo’s virtual assistant Alexa has
enabled Capital One customers to do their Capital One
banking by voice, including checking balances, reviewing
transactions and making payments
Connected cars means having internet in the car.
it makes driving safer and more efficient. For example,
it can sense that the distance of the car in front is too
close and forces the driver to slow down. it can provide
automatic crash notification, stolen vehicle diagnostics
and real-time traffic information. in addition, it can
automatically reserve a hotel room or a table at a
restaurant based on a set of specific criteria. while it
is still early days for the integration of payments with
connected cars, in the future a car might be able to
self-detect parts that need to be replaced, schedule an
appointment with auto repair shops and automatically
make a payment when the service is completed. Also,
merchants could send promotional offers to cars within a
certain radius
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business ioT
business ioT can be divided into multiple segments by
industry (. agriculture, transportation, manufacturing,
healthcare and etc.). businesses within each segment are
leveraging ioT to help them reduce costs and improve
operational efficiency. For example, farmers are using
sensors and connected objects to monitor animal health,
collect information from crop yields, weather data and
more. Companies such as Aneomon (Switzerland) and
eCow (uk) are developing products for smart farming.
Fleet management companies can use ioT to track
the vehicles and collect analytics to measure drivers
behaviour, provide guidance for route optimisation, send
alerts in dangerous situation etc. Manufacturing factories
and plants are using connected objects to collect real-
time data about processes, monitor performance and
take certain actions under pre-determined terms and
conditions. healthcare providers are deploying wearable
devices for at risk patients to wear at home.
The examples of ioT business applications can be endless.
The aforementioned examples are just to illustrate
some of the potential around ioT. while today, the main
focus of ioT for businesses is to reduce costs, improve
transparency and increase efficiency, tomorrow we might
see more business-to-business (b2b) payment transactions
via ioT.
new purchase experience
ioT will certainly create new opportunities to facilitate
consumer shopping experience. The focus is more about
the process of buying than only looking at payments.
68% of the survey respondents believe that ioT will
revolutionise the payments industry as every connected
device could become a vehicle for commerce. in most of
the use cases related to ioT, payments will be embedded
in the devices (either physically or in the cloud) and
will become transparent to consumers. Consumers will
not need to input all their payment card details as they
do today with most e-commerce transactions. Their
previously stored payment details will be used in the
background to finalise the purchase. Consumers might
not even need to confirm some of their purchases as
transactions may be automated.
ioT data can be leveraged to interact with consumers
and power contextual commerce. Techcrunch describes
contextual commerce as “the potentially game-changing
idea that merchants can seamlessly implement purchase
opportunities into everyday activities and natural
environments”. Connected objects have the potential to
shorten the time needed between consumers wanting
a product and the time needed to buy it. Christian von
hammel-bonten, EvP Global Product Strategy at wirecard,
appropriately captures this trend: “in the past, people
didn’t want to pay, they wanted to buy. now, people don’t
want to buy, people want to have.”
Connected objects can be integrated with the different
stages in the consumer purchasing process (pre-purchase,
at time of purchase and post-purchase) to address
consumers’ pain points:
Pre-purchase – the time required to research the
product, go through online reviews, check inventory
availability and compare prices across different merchants
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At the time of purchase – the long and tedious checkout
process at certain websites or the long line in store, select
the appropriate payment method that is secure and
transparent and maximise the value for consumers (.
best rewards)
Post-purchase – the refund / exchange process,
insurance / warranty of the product and maintain
receipts / invoices
As ioT begins to more effectively address these pain
points, consumer interest and adoption are expected to
increase.
Challenges
Today, the ioT eco-system remains fragmented and lacks
standards for interoperability. There is no clear way
to interpret and secure the data transferred between
connected devices, which makes it difficult to achieve a
framework that allows openness and interoperability.
84% of this year’s survey respondents think that security
remains the biggest concern as sensitive financial data is
involved, data privacy and security related issues need to
be resolved.
There are four key aspects related to the security of ioT
commerce transactions:
Certifying the connected objects against any tampering
Securing all points of interaction, in particular the
enrolment process, to avoid any potential loopholes for
data breaches in the payment process
Creating a secure vault that will store payment details
and generate tokens
using appropriate fraud prevention solutions – this
could be based on device fingerprinting of the connected
objects as well as additional data to score payment
transactions with a fraud rule engine
Security and privacy are very important to consumers as
well as to businesses. Trust and authentication must be
embedded in all elements of the ioT, including the devices,
networks and software apps. however, these issues
remain one of the biggest challenges for ioT today.
in addition, the management of big data is another
concern around ioT. The connected objects will generate
and use a significant amount of data. The challenge will
be how to appropriately use this data in the context of
commerce without compromising privacy.
The future of ioT is not far away
while there are challenges that need to be addressed
along with the fast growing ioT eco-system, the various
connected objects will likely change the way consumers
shop, pay and live. Given the current ioT market size and
its potential growth, there is strong potential for ioT to
achieve widespread adoption in the coming years. 46% of
the respondents indicate that ioT will become mainstream
within the next 3 to 5 years, and 37% believe it will be
within 6 to 10 years.
The impact of the ioT on payments
> Security remains the biggest concern as sensitive financial
data is involved, data privacy and security related issues
need to be resolved
> IoT will revolutionise the payments industry as every
connected device can be a vehicle for commerce
“84% of this year’s survey
respondents think that
security remains the biggest
concern for ioT
”
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