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Disruptors in Payments

Richard SandersDisruptors in PaymentsSeptember 2013Confidential12AgendaThe Current MarketplaceThe Disruptors in the Payments IndustryBig dataSocial networksThe internet of thingsMobileCommerce platformsThe cloud(G)localBusiness modelsOther disruptorsSummary and ConclusionsConfidentialMeets the challenge of change2The Current Marketplace3Trending to the new reality

Source: CitiThe Disruptors in the Payments Industry5The Disruptive Forces on the Payments Industry

Almost all disruptive innovations do one of two things (or both)They provide a new benefit They solve an existing problemThe Disruptors in the Payments Industry Big Data78What is Big Data?Evolved from Big Science which described the rapid cycle of changes that occurred in scientific disciplines during and after WW2. Term first used in the late 1990s to describe massive information volumes which increase as more digital records created every day e.g. 3,000+ photos uploaded to Facebook every second (300 million a day)Google 5 exabytes of information (1,000,000,000,000,000,000 bytes) created by the entire world between the dawn of civilization and 2003. That same amount is now created every two days.Organizations are drowning in data which will increase through unlimited bandwidth and storage, with device ubiquity and cheap chips.ConfidentialMeets the challenge of changeList the names and roles, if known, of the customer attendees8What is Big Data?9The power of Big Data is it provides a more personalised approachLeveraging structured and unstructured data to increase cross-selling opportunitiesCreating the customer segment of one , reducing marketing spend but increasing customer engagementCreating the insight that informs the decision that delivers a customer experience

ConfidentialMeets the challenge of changeList the names and roles, if known, of the customer attendees910Big Data is Important Because Those Who Make Sense of It Will Win in Competitive MarketsTechnology players e.g. Amazon, Apple, Google and FacebookSee leverage of data as the productKnow how to sift data and make sense of it which is why banks fear them. Understand your social activities, financial transactions, lifestyle etc as a competitive weapon and have partners to offer real-time deals/alertsThe banks biggest weaknesses are:Their heritage and organizational structure as they separate data functions from product functions by holding data separately in silo divisions. This does not allow them to leverage data and weakens their ability to use it to deepen relationships and compete. This is the big opportunity for new entrants.

ConfidentialMeets the challenge of changeList the names and roles, if known, of the customer attendees1011Big Data is Important Because Those Who Make Sense of It Will Win in Competitive MarketsOne bank CEO recently stated Our peers I can handle. Theyre in the same boat.If Google opens a bank, with their data were in trouble.And Eran Fiegenbaum, the director of security for Google Apps, has already made it clear that Google is a bank for your data.Conclusion: medium disruptive threat

ConfidentialMeets the challenge of changeList the names and roles, if known, of the customer attendees11The Disruptors in the Payments Industry Social Networks12The New Entrant Disruptors

Big Numbers

Social Media the new reality

Social Network Myths Banks Believe Myth banks need to stop believing: Its for young people only which stems from the stereotype that new, hip, cool technology is for those who adapt the fastest. It's not:Its for people who want to communicate on-lineIt's for those who enjoy that technology improves their livesFacebook and Twitter have more users over the age of 25 than underMost social media users are wealthy, educated, in employment and mature - the banks target audience for CRM.Social media as a medium for financial transactions is still treated with caution due to reasons like information security/hacking etc and lack of awareness created among customers. Conclusion: medium disruptive threat

ConfidentialMeets the challenge of changeThe Disruptors in the Payments Industry The Internet of Things17

What is the Internet of ThingsConnectivity for anyone from any time and any place with anything!A wireless network, usually self-configuring between objects like household appliances -Wikipedia. By embedding short-range mobile transceivers into gadgets and everyday items new forms of communication between people and things, and between things themselves will emerge. The term "Internet of Things" has come to describe a number of technologies and research disciplines that enable the internet to reach out into the real world of physical objects.

ConfidentialMeets the challenge of changeAn interesting conclusion18The challenge of the Internet of ThingsTechnological architecture and standardization in most areas are still fragmented curtailing interoperability.Connections between the real and virtual worldsManaging and fostering rapid innovation is a challenge for governments Privacy and securityAbsence of governance, naming, identity, interfacesHow to convincing users that the IoT technology will protect their data and privacy when tracking Potential solutionsEducation and informationLegislation limiting the scope of the Internet of ThingsConclusion: currently low disruptive threat

ConfidentialMeets the challenge of changeAbsence of governance is the first main challenge

One major barrier for the widespread adoption of the Internet of Things technology is the absence of governance. Without an impartial governing authority it will be impossible to have a truly global Internet of Things, accepted by states, companies, trade organizations and the common people. Today there is not a unique universal numbering scheme as just described: PCglobal and the Ubiquitous Networking Lab propose two different, non-compatible ways of identifying objects, and there is the risk to have them competing in the coming future over the global market. There is also the need of keeping governance as generic as possible, as having one authority per application field will certainly lead to overlap, confusion and competition between standards. Objects can have different identities in different contexts so having multiple authorities would create a kind of multi-homing, which can lead to disastrous results.19The Disruptors in the Payments Industry Mobile20

Mobile Payments and eCommerce will Comprise an Increasingly Larger % of Payments VolumesOvum believe mobile is top of most Banks investment prioritiesWhy?Phone is a more powerful device than the PCKnows who you areKnows when you are in/near storeKnows your purchase/search historyDelivers instant gratification5x more phones than PCsIn store sales are still 19x greater than eCommerceSOURCE: Yankee Group, Dec 2010; Press search; McKinsey Global Payments Map2010Global PaymentFlows : $516TeCommerceFlows: $1,700B

Mobile PaymentFlows: $10B

2015Global PaymentFlows: $780TeCommerceFlows: $3,420BMobile PaymentFlows: $545BCAGR: +122%CAGR: +9%Total Flows:CAGR: 15%ConfidentialMeets the challenge of changeTraditional Paradigms for Payments are converging in Mobile

Source: VisaMobiles Impact on the Customer Experience

24The Disruptive Influences MobileMobile is transformationalMoving people from having to go somewhere to do something to having connectivity in their pocket/purses 24x7.Gives 7 billion people the ability to communicate wirelessly, globally and socially one-to-one, person-to-person, peer-to-peer.Most affluent consumers change their mobiles every 18 monthsProvides a transactional infrastructure that was non-existent just a few years ago. Africa has seen the most rapid transformation through mobile, with e.g. M-PESA in Kenya Allows geo-locating to locate anyone, anywhere, anytime and say at the point of retailing: heres the deal. U.S. bank BBVA Compass - Banks that fail to invest in mobile risk being swept away by a wave of disruptive innovation

ConfidentialMeets the challenge of changeList the names and roles, if known, of the customer attendees24The Disruptive Influences Mobile25Why?Phone is a more powerful device than the PCKnows who you areKnows when you are in/near storeKnows your purchase/search historyDelivers instant gratification5x more phones than PCsIn store sales are still 19x greater than eCommerceConfidentialMeets the challenge of changeList the names and roles, if known, of the customer attendees25The Disruptors in the Payments Industry Commerce Platforms 26The New entrant Disruptors

The Disruptive Forces AmazonAmazon Have launched the Amazon Coin, tied to the US$ that can be used to buy apps for the Kindle, and cannot be exchanged for other currencies.Are aggressively offering loans to small businesses, but the proceeds can only be used to purchase items from its sites.Is focused on its own businesses and unlikely to disrupt the payments landscape in the short term.Conclusion: low disruptive threat

ConfidentialMeets the challenge of changeThe Disruptive Forces Google StrengthsAn experienced disruptor! Heavily promoting its wallet, which it is offering for free Launched a credit card in the U.S. and U.K. (with MasterCard) Offering loans for purchasing AdWords Dangerous because it gives valuable things away for free. For the Currently focused on advertising, not payments.Weaknesses Marketers targeting smartphone and tablet users Drop in shares price blamed, in part on mobile marketing. The average cost per click dropped as mobile marketing took budgets away from traditional desktop advertising.

ConfidentialMeets the challenge of changeThe Disruptive Forces Google BGC - The challenge is for Google to reignite revenue growth as their existing businesses start to mature and slow down.Google, like the rest of the online world, is realizing the power of mobile marketing is greater than predicted, and an evolution will be required in order to be able to keep up with the changes that it demands.Conclusion: medium disruptive threat

ConfidentialMeets the challenge of changeThe Disruptive Forces AppleAppleHas a wallet product Passbook based on QR technology Was expected to add NFC to the iPhone5 but did not. Now rumours of an iWatch for payments linked to an Passbook-enabled iPhone .Acquired biometric scanner maker AuthenTec in 2012 Has the worlds largest database of consumer payment information (from iTunes)Already has products being used as POS devices

Already has an impressive track record of disruption ConfidentialMeets the challenge of changeThe Disruptive Forces AppleAlready has an impressive track record of disruption Apple has all the necessary pieces and a HUGE motivation for disruption as it could save a lot of $ as the cost of the current payment system to them is huge. Expect them to do something about it. They have it all: an established customer relationship, a trusted brand, payment information, purchase and POS devices, a channel, and deep pockets. Conclusion: high disruptive threat

ConfidentialMeets the challenge of changeThe Disruptive Forces PayPalAn alternative network and enemy to all things traditional in the banks viewPayPal is already in the payments business. It: Is an acquirerHas banking licenses. If it became a bank it would be the largest in the worldHas 230 million accounts and moves more than $2 million every hour!. Facilitates transactions via multiple methods (and discriminates between them)Is moving from an online payment processor to a one-stop-payment-shop: online, offline, and mobileHas made deals with offline retailers like Starbucks, Home Depot, etc. Has arrangements with Discover (Cards) and NCR (POS equipment )Has 110 million active users

ConfidentialMeets the challenge of changeThe Disruptive Forces PayPalAn alternative network and enemy to all things traditional in the banks view

PayPal is an ambitious player with a good brand, a wide reach, a reputation for agility, and deep pockets. Unlike Apple, it born in the payments industry. This IS their core business. Conclusion: high disruptive threat

ConfidentialMeets the challenge of changeThe Disruptors in the Payments Industry The Cloud35What is the Cloud ?Cloud computingIntegrated and networked hardware, software and Internet infrastructure (called a platform) hiding complexity via simple GUI or APIDigital model so customers can access from anywhere they like, anytime. Provides always on, on- demand services, anywhere, anytime, any place. Allows customers (consumers, business) to pay for use as needed.BenefitsEfficiency - large scale at a lower cost to IT, operations etcSoftware not tied to a particular piece of hardwareEnables dynamic provisioning to handle peak loadsProvides IT responsiveness or temporary resources e.g. for year endSpeed to MarketImproved service to customers through more consistent uptime and integration their cloud based applications/servicesConfidentialMeets the challenge of change Cloud Issues for PaymentsIntegration and business relationship of Cloud-based services Legacy and the Cloud Ability to integrate into IT and application frameworkIn-house vs. external staffingResources vs. experienceRegulation Regulators in key markets, particularly in finance regulate that data must be held on bank premises.Compliance all the way through the chain Security How the Cloud provider protects the data, where they are located, the standards used etcEncryption will also make data more secure, as well as an enterprise architecture that is built for security and needs approval from regulators How to undertake fraud detection in the Cloud?Conclusion: high disruptive threatConfidentialMeets the challenge of changeThe Disruptors in the Payments Industry G(Local)38(G)localA combination of the words "global" and "local" used to describe a product or service that is developed and distributed globally, but is also fashioned to accommodate the user or consumer in a local market.In the business world the idea was adopted to refer to global localizationBasics: A global company designing products for a local community.Conclusion: low disruptive threat at this time because idea needs more development

ConfidentialMeets the challenge of changeThe Disruptors in the Payments Industry Business Models40New payment players apply new revenue models to enter the market

Source: McKinsey and CoThe New Competitors and the New Payments Landscape

The Disruptors in the Payments Industry Other Disruptors43Regulation44

Financial Services Bill 2012List the names and roles, if known, of the customer attendees44The Disruptive Forces Merchants More stores moving into the digital space or let customers to buy online and pick up in store.

Have to ensure they offer all the channels the customer wants to use for payment

Will have to upgrade their POS terminals Tesco are yet to take contactless cards

Must respond to threats like geo-location not offering a signal in their stores is not a solution

Could the US MCX model emerge in EMEA ?

Need more functionality from their acquirers

Conclusion: Some have the ability to be major players because they have banking licences, mobile offerings, greater data, on-line channel and loyal customers : high disruptive threat

ConfidentialMeets the challenge of changeThe Disruptive Influences Consumers

The Disruptive Forces Digital WalletsThe Term Wallet was used so Old People Understand what the application delivers DMUS Conference Sept 12Most of the big players are on the wallet bandwagon (card companies, telcos, Apple, Google, industry consortia)Different varieties: NFC (Google Wallet), QR (Apple, LevelUp)Cool factor: keeps the card in the pocket. In some systems, even the phone stays in the pocket (Sum up and Pay with Square)Great opportunity for added services (for consumers and merchants), targeted marketing, consumer tracking, couponing, loyalty, etc.Innovative e.g. Tescos shopping wall in South KoreaBut slower adoption than expected: so far, digital wallets have more bark than bite. Widespread adoption (NFC, QR) might change that. There will be winners and losers depending on the walletments system. Conclusion: low disruptive threat for now

ConfidentialMeets the challenge of changeThe Disruptive Forces Loyalty ubiquitous and used regularly

Source: WorldPayConclusion: low disruptive threat unless exploited by other disruptorsThe Disruptive Forces BiometricsNot yet a clear winner of the one to use fingerprint, voice, veinFace recognition is the latest from the NordicsMay not be one global solutionLikely slow adoption rate but it is already rolling outConclusion: low disruptive threat currently, but could increase

ConfidentialMeets the challenge of changeThe Disruptive Forces BitCoinViolent fluctuations in value an issueBeing accepted in e.g. some U.K. pubs and independent storesNow on Regulators radarConclusion- low disruptive threat for now

ConfidentialMeets the challenge of changeConclusions51With all this disruption it is no longer clear who owns the customer

Source: VisaBut the Customer maybe has more power than ever before - the ultimate disruptor

Source: VisaThe Disruptive Influences54Big data, Cloud and mobile are the key to the impact of the disruptors as they bring this all together and are required for delivery.The Cloud provides the ability to analyse unlimited amounts of data for any purpose. It is the antidote to big data which is all about drowning in exabytes of bytes, while Cloud provides the capability to gain access to unlimited power and storage to analyse that data.New Payment platforms and business models can harness these without having to move from legacy systemsSo these are centrifugal forces of change in 2014, as they are massively complementary. Mobile allows anyone to socialise with anyone on the planet, whilst the cloud allows companies and government agencies to sift through the massive amounts of data that the mobile, social world is creating.ConfidentialMeets the challenge of changeList the names and roles, if known, of the customer attendees5455The Impact of the Disruptive Influences on Players in PaymentsBanks must get consumer trust back and expect more mergers in some markets. BUT have to adapt and get to grips with the disruptive influences especially mobile, Cloud, new competitors and big data. The clock is ticking!Acquirers vulnerable in a mobile world and to new competitionCard Schemes need to up their game and fully integrate the acquisitions they have made and stop squabbling e.g. IzettleTelcos power if they choose to use it, but do they have the appetite, consumer trust, the cash or the customer service ? Geo-locating is a key change but targeting requires massive analytical capability of data to target what is relevant to whom and when Equipment vendors in for a bumpy ride as e.g. dongles multiply and add functionalityMerchants are frustrated and feel constrained by the current system. Their costs are high and unpredictable. They want a stronger relationship with their customers and to add services.

ConfidentialMeets the challenge of changeList the names and roles, if known, of the customer attendees5556The Impact of the Disruptive Influences on Players in PaymentsNew players commerce platforms and social networks the real unknown some have the power/cash to cause real disruption others less so. Its all about appetiteConsumers are generally satisfiedthey trust the current system, they know how it works, they see it as inexpensive and convenient. BUT, they are starting to see the real costs; they want more information and services faster; and are more open to alternatives (the iPhone effect). So they are the ultimate disruptorConclusionsMost players in payments need the banks but are not loyal to them. If they see something cheaper and better (or free), they will jump. That is the threat the new acquirers bring.The current system will survive, with changes. The winners and losers will be unequally distributed. Regulation (especially SEPA) will have a role to play and could be seen as unfair to the banks.

ConfidentialMeets the challenge of changeList the names and roles, if known, of the customer attendees56www.aciworldwide.com

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