Volume 8, Number 21 May 2015 McKinsey on Payments 8, Number 21 May 2015 McKinsey on Payments...

May 2015Volume 8, Number 21

McKinsey on Payments

Foreword

Gauging the disruptive potential of digital walletsWhile they have established a solid foundation for growth, digital wallets are by nomeans a guaranteed success. They must continue to evolve if they are to have a trulydisruptive impact on the payments landscape. Providers can improve their chancesby focusing on six “markers” for success in payments innovation.

New partnership models in transaction bankingA number of trends are leading to a fundamental rethinking of the traditional modelby which banks offer transaction banking services to clients outside their establishedmarkets. Four distinct partnership models offer the best opportunities for banksseeking to succeed in an evolving landscape.

Toward an Internet of Value: An interview with Chris Larsen, CEO of Ripple LabsMcKinsey on Payments sits down with the co-founder of Ripple Labs to discuss thenuts and bolts of the Ripple protocol, the implications for the correspondentbanking model, and the emergence of an “Internet of Value.”

Faster payments: Building a business, not just an infrastructureA faster payments infrastructure is not an end in itself, it is an opportunity for banks to deliver innovative products and services in both consumer and corporatepayments. To monetize this opportunity, financial institutions should focusrelentlessly on design, customer experience, accessibility and convenience.

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McKinsey on Payments is written by experts and practitioners in the McKinsey & Company Payments Practice.

To send comments or request copies, email us at: [email protected]

To download selected articles from previous issues, visit:http://www.mckinsey.com/paymentspractice/knowledge_highlights

Editorial board: Tim Arscott-Mills, Rohit Bhapkar, Philip Bruno, Olivier Denecker, Yran Dias, Vijay D’Silva, Sameer Gulati, Flavio Litterio,Robert Mau, Marc Niederkorn, Kausik Rajgopal (Chair)

Editors: John Crofoot, Peter Jacobs, Anne Battle Schultz

Global Payments Practice manager: Natasha Karr

Executive editor: Allison Kellogg

Managing editor: Paul Feldman

Design and layout: Derick Hudspith

Copyright © 2015 McKinsey & Company. All rights reserved.

This publication is not intended to be used as the basis for anytransaction. Nothing herein shall be construed as legal, financial,accounting, investment, or other type of professional advice. If any suchadvice is required, the services of appropriate advisers should be sought.No part of this publication may be copied or redistributed in any formwithout the prior written permission of McKinsey & Company.

ForewordWelcome to issue number 21 of McKinsey on Payments. In this issue, we lookbeyond the headlines on several exciting trends to uncover the deeper implica-tions and opportunities for industry players.

Digital wallets are certainly of the moment, with the recent high-profile launchof Apple Pay and other new ventures. Despite the excitement and the real bene-fits of digital wallets, however, the question of how they become successful atscale is still open. A knowledge of what drove the success—or failure—of previ-ous payments innovations can help plot a path forward. Our lead article, “Gaug-ing the disruptive potential of digital wallets,” provides such a view, examiningsix specific markers of success we have noted previously in McKinsey on Pay-ments that digital wallet providers should keep in their sights.

As we know, change is constant, whether convenient or not. In transactionbanking, which accounts for 40 percent of total corporate banking revenues, anumber of trends are shaking up the traditional model. For instance, continuedglobalization of the banking client base translates into more demand for cross-border services. This not only requires more in the way of services from banks;it also heightens regulatory complexity. For many banks, the best way forwardwill be to develop partnerships that give them access to new markets but helpkeep risks to an acceptable level. Our second article, “New partnership modelsin transaction banking,” describes four examples of how banks can cooperate ina changing and challenging environment.

Next, we continue our interviews with market innovators in payments. In thisissue, we sit down with the CEO of Ripple Labs, Chris Larsen, for a discussionof how the Ripple protocol could help evolve traditional models of correspon-dent banking. In the interview, we discuss the origins and the mechanics of theprotocol, the benefits and costs of “friction” in moving money between banks

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Kausik Rajgopal

2 McKinsey on Payments May 2015

and across borders, the approach to risk management, and Ripple’s role in thepotential emergence of an “Internet of Value.”

Our final article continues to build McKinsey’s perspective on the developmentof “faster payments” systems in a number of markets around the world, kickedoff in our previous issue (“Transforming national payments systems,” September2014). In that article, the authors argued that the design of faster payments sys-tems needed to focus not just on speed but on specific use cases; speed is ameans to an end, not an end in itself in payments. In “Faster payments: Build-ing a business, not just an infrastructure,” we look beyond the infrastructure is-sues to discuss how financial institutions can create new revenue streams thatjustify the significant investments in the faster systems.

We hope you find the articles in the issue informative and thought-provoking,and we look forward to your comments and feedback.

Kausik Rajgopal is a director in McKinsey’s Silicon Valley office

and co-leads McKinsey’s Global Payments Practice.

Yet for many in the payments industry thequestion of whether digital wallets (see“Defining the digital wallet,” page 4) willultimately succeed is still an open one. Inthe U.S., PayPal and other early digital wal-lets attained scale through online com-merce, but attempts to bring mobilepayments into the physical world have hadlimited success.

To provide a structured perspective on howdigital wallets will evolve, this articleexamines the market through the lens ofMcKinsey’s six markers of paymentsdisruption success (first described in “Thefuture of payments: Markers for success,”McKinsey on Payments, June 2011). The sixmarkers are grouped in three critical areas:designing a compelling value proposition;executing a measured go-to-market strategy;and planning thoughtfully for expansion.

Design a compelling valueproposition

1. Deliver significantly more customer valuethan rivals. Entering payment credentialswhen shopping online is often consideredcumbersome, making convenience a long-standing consumer payments priority. In theU.S., McKinsey’s annual Mobile ConsumerPanel consistently identifies convenience asthe leading factor in consumer adoption ofmobile payments. Most digital wallets, in-cluding Apple Pay, Visa Checkout andGoogle Wallet, accordingly emphasize con-venience in their value proposition. Untilnow, however, paying with smartphonesoffline in markets where card penetrationis strong has been only slightly more con-venient than existing methods.

While most payments industry advancesmust overcome inertia and network effects,

3Gauging the disruptive potential of digital wallets

Sameer Gulati

Marie-Claude Nadeau

Kausik Rajgopal

Gauging the disruptive potential ofdigital wallets

Digital wallets are having a moment. The recent launch of Apple Pay and the

accompanying media attention are bringing them into the mainstream.

Technological and market developments have expanded their potential. Payments

networks have shown a willingness to unbundle their offerings and permit non-

bank players to use their tokenization protocols. EMV technology adoption in the

U.S. has accelerated. And consumers are more open to adopting digital-wallet-

like offerings like mobile boarding passes and Starbucks’ loyalty app.


motivating consumers to alter their funda-mental payments behavior is particularlychallenging. In online commerce, PayPal ini-tially added convenience by introducingemails and passwords. Today, Apple Pay usesits fingerprint recognition feature, Touch ID,for online shopping, which replaces pass-words with biometric security. However, be-cause consumers still perceive credit anddebit cards as a major convenience for on-site transactions, digital wallets will needeven stronger value propositions to displaceentrenched card-based payments.

Digital wallets that demand more effort andtime than currently favored payments meth-ods are also unlikely to gain widespreadadoption. For instance, requiring buyers toadd devices to their phones, narrowly limit-ing the forms of accepted tender, or requir-ing manual entry of bank information couldall hinder acceptance.

To significantly increase customer conven-ience, providers should expand wallet func-tionality beyond basic payments capabilities.Options include digital storage of ID cards,driver licenses and other items carried intraditional wallets (Exhibit 1). The Osaifu-Keitai wallet developed by NTT DOCOMOin Japan, for example, includes electronicmoney, credit cards, ID cards, loyalty cardsand electronic fare collection on public tran-sit. Digital wallets could include applicationsthat deliver targeted offers, which could bedesigned to redeem automatically at thepoint of sale—a major convenience forvalue-oriented consumers. India and severalother nations are even considering the is-suance of personal IDs that could be storedin digital wallets.

In addition to convenience, Apple is empha-sizing security and privacy in Apple Paymarketing. Other wallets, including PayPal’sand Turkey’s BKM Express, address theseconcerns by withholding payments detailsfrom merchants. Historically, consumershave considered security and privacy to beimportant primarily for online and mobiletransactions, but recent breaches of carddata at retailers suggest that value proposi-tions containing strong security and privacycomponents could be effective in drivingwallet adoption.

While most payments industryadvances must overcome inertia andnetwork effects, motivating consumersto alter their fundamental paymentsbehavior is particularly challenging.

Defining the digital wallet

The term digital wallet has been applied to diverse forms of electronic payments, even some as simple as

prepaid cards. In addition to money, however, traditional wallets also typically hold various forms of pay-

ment and identification that might be stored and accessed digitally. This article therefore defines the digi-

tal wallet as a software application that enables users to digitally store money, payments credentials and

more, and to use these to implement various types of cashless transactions.

2. Create broader merchant value proposi-tions.Minimizing cost is a top merchant pri-ority in payments. The Merchant ConsumerExchange (MCX), for example, which com-prises more than 60 U.S. member retailers,is establishing a digital-wallet platform de-signed to reduce members’ costs. The plat-form addresses member concerns about rivaldigital wallets, like Apple Pay, that indexheavily on credit cards and can thereforeskew a merchant’s payments mix towardhigher-cost methods. But excessive focus oncosts might also reduce consumer appeal—for example, by requiring shoppers to dis-close information they are unaccustomed toproviding for retail payments, such as bankaccount numbers in the U.S. Historically,payments disruptors that focused on cost atthe expense of customer experience have

failed to attain scale. So to succeed, digitalwallets like MCX will need to find otherways to drive revenue growth. Possibilitiesinclude improving the customer experience,more effectively delivering offers and loyaltypropositions, and collecting and sharingmore consumer data with merchants.

For online and mobile commerce, paymentsand digital wallet innovators like PayPal’sBraintree have recently gained a footholdby delivering seamless customer experi-ences that dramatically increase purchaseconversions. Conversion is valued highly bysmaller online and mobile merchants intenton winning new customers and gaining re-peat business. Some digital wallets build onthe shopping experience developed by retailgiants like Amazon and Walmart, who ex-


Digital walletPotential applications

In-person retail card/cash alternative

NFC, QR-codes

IdentityDriver’s license,

health cards, boarding passes

Mobile/E-commerce “check-out”

Mobile site or in-app purchases

Mobile paymentsPayments processing, card swipe “sleeve”

Mobile incentives and loyalty

Coupons, location-based offers,

“pay with loyalty points”

Peer-to-peer/digital goods

Pay friends and purchase

music, apps

Banking and bill pay

View accounts and transfer money

Source: McKinsey Payments Practice

Exhibit 1

The digital wallet presents diverse commerce-related applications extending well beyond payments


pedite the checkout process by storing andauto-populating previously used paymentscredentials. These innovators offer this ca-pability and conversion performance tosmaller merchants who cannot develop thetools themselves. The payments processorStripe, for example, minimizes cost whileproviding easy merchant integration and anuncomplicated customer experience. Ex-tending such merchant propositions to thephysical world is another way for digitalwallets to offer merchants more than justcost savings.

Execute a measured go-to-marketstrategy

3. Penetrate niche market segments first.Consumers’ expectations for digital walletsvary widely, so it is difficult to address themall at the outset. One approach is to initiallytarget smaller market segments. This enablesnarrow tailoring of product design, partner-ships and marketing, which not only im-proves the odds of early success and keepscustomer acquisition costs manageable, butalso lets the wallet provider offer merchantsquick access to customer segments, whichcan be an important incentive.

In the early niche-market stage, issuers canalso pursue smartphone users (Androidusers in the case of Google Wallet; iOS inthe case of Apple Pay). For merchants,these might be frequent users of their pro-prietary mobile apps. The issuer might, forinstance, create a simple link with existing-app functionality to avoid confusion be-tween the wallet and other apps. Definingand delivering a value proposition for thesecustomers will be critical to gaining earlyadoption.

4. Leverage existing ecosystem and infra-structure. The tokenization protocol devel-oped by EMVCo (used for the first time byApple Pay and likely to be adopted by oth-ers) illustrates this important successmarker well. By using 16-digit tokens—thesame format as existing credit and debitcard numbers—along with other existingdata fields, the protocol enables more se-cure routing of payments via establishednetworks and POS infrastructure whileminimizing requirements and network in-tegration costs.

Wallet-like merchant apps, including thoseof Starbucks, Otto’s Yapital in Germany andTarget’s Cartwheel in the U.S., also use ex-isting POS infrastructure to drive consumeradoption. Because these products use QRcodes, however, related apps do not requirenear-field-communication (NFC) termi-nals. By contrast, Apple Pay, Google Walletand others use NFC to deliver a seamlesscustomer experience that, in the U.S., hasthus far come at the expense of broad mer-chant acceptance. But, as merchants re-place older payments terminals with NFC-and EMV-enabled models, this obstacleshould diminish in importance.

When expanding into new marketsdigital-wallet providers should proceed

cautiously. Markets often differsignificantly in such critical aspects as

card interchange economics,regulatory environment, technologypenetration and consumer behavior.

Plan thoughtfully for expansion

5. Adapt offerings to other markets.Whenexpanding into new markets, digital-walletproviders should proceed cautiously. Mar-kets often differ significantly in such criticalaspects as card interchange economics, reg-ulatory environment, technology penetra-tion and consumer behavior. Markets withsubstantial economic differences, for in-stance, can present considerable challenges,such as lower levels of interchange. This canmake charging incremental fees to issuers(such as Apple Pay’s 15 bps fee) more diffi-cult, and can also negatively affect networktokenization economics. In markets with lowinterchange fees, such as the EU, wherecredit card interchange will fall below 0.3percent, wallet providers might need to findmonetization alternatives (Exhibit 2).

In addition to putting pressure on inter-change economics, regulations can also pres-ent challenges to data-gathering efforts andanalytics-based value propositions related towallets. Apple Pay has said it will not collectpayments information, but Google Walletand others might decide to gather and usepayments data, in which case they will facedifferent security and privacy constraints inthe markets they enter.

Established consumer payments preferencescan also have an impact on digital-walletsuccess. For example, bank account-fundedwallets might gain ground faster in marketslike Germany and India, where non-cardpayments methods (including direct bankaccount access) are more common. Intro-duced in the Netherlands in 2005, the


00

0.5

1.0

1.5

5 10 15 20 25 30 35

Average interchange level for credit cards Bps

Debit and credit card penetration Percent

Card penetration and interchange levels by country, 2013

India

Brazil

China

France

Spain

Sweden Germany

UK

Canada

U.S.

Source: Strategy Analytics; IDC

Exhibit 2

Digital wallet business models must adapt to diverse market conditions, such as varying interchange levels


iDEAL wallet platform, which does not usedebit or credit cards, gained acceptance at100,000 online stores. Conversely, in Euro-pean markets where rewards play a smallerrole, pay-with-points wallet features wouldlikely have less appeal.

In some countries, new entrant wallet prod-ucts, even those with advanced features, willhave to compete with incumbent offeringsalready embedded in the infrastructure. InJapan, a market that is highly conducive tolaunching new technologies, the Osaifu-Keitai wallet has 10 years of history and isnow used even for government-issued IDs.In South Korea, Bank Wallet Kakao was re-cently launched in partnership with 16 Ko-rean banks, as well as the Korea Financial

Telecommunications and Clearing Institute,making displacement a tall challenge.

From the technology standpoint, mobilewallet providers will also need to adapt todifferences in smartphone penetration lev-els and merchant-acceptance technologiesin different markets. Apple Pay, for in-stance, is likely to have a smaller presencein markets such as China, India and Koreawhere iOS penetration is low (Exhibit 3).Similarly, NFC wallets should gain quickeracceptance in places where that technologyalready has a strong presence, such as Aus-tralia and the UK.

6. Tap adjacent profit pools to differentiateofferings and add value. Convincing prospec-tive partners to pay for wallet services solely

iOS share of handset shipments Percent of units shipped, 2013

≤5 6-10 N/A5-6 >10

Source: Strategy Analytics; IDC

Exhibit 3

Apple Pay adoption could be slower in countries with lower iOS market share

on the basis of transaction volume may gen-erate only modest revenues because it tapsa profit pool that, in many markets, is al-ready under margin pressure. In the pay-ments value chain, the war over endpoints(such as the consumer and merchant inter-faces in the case of wallets) is already com-pressing margins in mature markets asproviders continually offer more compellingrewards and discounts.

In mature market pockets where inter-change revenues are under pressure, suchas PIN and debit cards in the U.S., tok-enization fees may provide a viable alterna-tive. While these fees tap the same revenuestream, they also promise to reduce riskcosts throughout the payments value chain.

Wallet providers therefore might need toseek alternative revenue streams that offermore meaningful growth potential—possi-bly commerce-related revenue streams (Ex-hibit 4). Coupons and data analytics, forinstance, have strong links to payments andtransaction data. In fact, the line betweenthe value chains of payments and com-merce is already blurring as paymentsprocesses blend into the purchase experi-ence—a change exemplified by Braintreeand rideshare provider Uber. This couldopen adjacent commerce revenue streamsto payments incumbents.

Given mapping capabilities at the device andcustomer levels, tracking the performance ofdigital-wallet marketing campaigns is also


3Wire 3Credit processing 4General purpose prepaid 5Issuer processing 6Cross-border 6Big data analytics Coupons 9Checks 10ATM 10Paid search 11Merchant acquiring 14E-commerce hosting 22Advertising

0.2Card-based loyalty programs 0.4General purpose prepaid

Mobile ads

7

0.6B2B card 1

Debit processing 2

ACH

1Cash

Money transfer 3Private label prepaid 3

134Card lending 134

2012 revenue streams, global $ billion

Commerce

Network

Payments value chain Source: McKinsey Global Payments Map;

McKinsey Payments Practice

Exhibit 4

Large revenue streams adjacent to payments blur the lines with commerce

easier in the offline world, facilitating theadoption of pay-for-performance models.This can become a winning situation forboth merchants and wallet providers,wherein merchants pay providers based onincremental rather than absolute sales, amodel which more closely aligns the incen-tives for both.

* * *

The recent convergence of payments andcommerce means digital wallets are here tostay. Yet, while they have established a solidfoundation for growth, to truly become apayments disruption they must continue toevolve. Many providers are, in fact, becom-ing more thoughtful about their go-to-mar-ket strategies, particularly as these relate to

initial market selection and building on ex-isting infrastructure. However, they alsoneed to develop more comprehensive con-sumer value propositions that can deliverthe magnitude of user-experience improve-ment that widespread consumer adoptiondemands. Finally, players will also need tothoroughly consider what is necessary to ex-pand successfully into other markets andrevenue pools—areas that present strongpromise for rapid growth, but in contextsthat may be especially challenging to digital-wallet economics.

Marie-Claude Nadeau is an associate principal in

McKinsey’s San Francisco office.Kausik Rajgopal is

a director in the Silicon Valley office, and Sameer

Gulati is a principal in the London office.


Historically, banks built geographic coverageand product capabilities for transaction bank-ing in-house. In cases where a company’sneeds exceeded the reach of the bank’s net-work, banks have relied on correspondent re-lationships. Some have agreements withhundreds of institutions around the world,any one of which may expose the bank to sig-nificant operational risk, bring high complex-ity costs, and deliver low levels of service.

Compounding these risks, emerging tech-nologies are now posing serious challengesto the correspondent banking model, includ-ing new threats of disintermediation by nim-ble non-bank attackers. Intense competitionand low interest rates are both pressuringtransaction banking margins, requiringbanks to eliminate waste and manage prof-itability rigorously.

In this challenging environment, banks mayseek to reduce the complexity of interna-tional networks by streamlining correspon-dent relationships and rethinking the overallstrategy for partnerships. This article exam-ines the market forces leading to the emer-gence of four new archetypes of bankcooperation and highlights the critical fac-tors banks must address as they implement a global strategy for partnering.

Structural trends reshaping themarket

The combination of an increasingly competi-tive market and reduced net interest income(NII) in a low-interest-rate environment isthe most obvious factor contributing to thesteady (and unsustainable) erosion of mar-gins. At a deeper level, three interrelated

11New partnership models in transaction banking

New partnership models intransaction banking

Transaction banking—which typically includes domestic and international

payments, cash management and trade finance—is vitally important for

corporate banks, accounting for approximately 40 percent of total corporate

banking revenues, contributing to liquidity and delivering attractive returns

on risk-weighted assets, as well as enhancing client stickiness. However, a

number of trends are leading to a fundamental rethinking of the traditional

model by which banks offer these services to clients outside their

established markets.

Alessio Botta

Steve Krieger

Raffaela Ritter


structural trends are exerting pressure onthe transaction banking business and pointto the urgent need to rethink the businessmodel for cross-border trade and transac-tion services: globalization, multiple regula-tory regimes and digitization.

• Globalization: Cross-border trade ac-counts for a growing share of world GDP.One reflection of this trend is the increas-ing number and type of companies requir-ing cross-border services to reach moregeographically diverse markets (also dis-cussed in “Insights into the dynamics ofnew trade flows,” McKinsey on Payments,May 2014). The biggest new trade growthis along corridors linking established mar-kets of “the North” (North America, West-ern Europe and mature economies in Asia)

with emerging economies of “the South”(Asia, Latin America, Africa and the Mid-dle East). This trend is due in part to theexpansion of the middle class in largeemerging market countries, which is turn-ing once uni-directional trade corridorsinto bi-directional corridors. Trade flowsbetween mature and emerging markets areexpected to grow 9 percent annually overthe next few years and account for half ofglobal trade flows by 2017 (Exhibit 1).

• Multiple regulatory regimes: As they in-creasingly provide access to diverse mar-kets, banks must comply with differing(and not always compatible) regulatoryregimes, some national, others regional inscope. National standards may also differfor domestic and foreign institutions,

Trade flow volumes by type of corridor (excluding services)€ trillion, percent

CAGR, 2012-17Percent

South-South1

20

2017F

100% = 14

North-South1

North-North

12

2012 2010 2005

8

2000

13111075

504846

4136

37414452

59

5 8

5

12

9

1 Emerging markets of the "South" include Asia, Latin America and Middle East, excluding Japan, China, Hong Kong and Singapore.

Source: IMF Direction of Trade statistics; Global Insights; McKinsey Global Payments Map

Exhibit 1

Emerging market trade corridors drive growth

while regional regimes aim to harmonizestandards across multiple countries. Forexample, an updated version of Europe’sPayments Service Directive is expected torequire all parties to a transaction—eventhose outside Europe—to be in compli-ance. The global patchwork of nationaland regional regulatory standards poseschallenges for international players, par-ticularly as they seek to establish a foot-print in new markets to meet client needs.

• Digitization: Gradual yet steady improve-ments in industry standards and platformsstrengthen the impact of digitization, en-abling banks to automate processes andintegrate systems. In recent years, indus-try organizations have released new elec-tronic standards to reduce paper andspeed the flow of electronic data across di-verse platforms (e.g., ISO 20022 for pay-ments, released by the InternationalOrganization for Standardization; and nu-merous enhancements to SWIFT messag-ing, including EBAM for informationreporting and account management, MT798 to support trade-related messaging,3SKey for secure authentication and au-thorization across multiple banks). Addi-tionally, industry groups and third-partytechnology providers have introduced newplatforms offering streamlined integration

with bank and corporate systems. Initia-tives such as the bank payment obligationand Bolero offer entirely electronic meansfor trade services, and numerous organiza-tions support diverse supply-chain financecommunities with cloud-based multi-bankplatforms. It remains to be seen which, ifany, of these new initiatives will gain criti-cal mass. The potential game changers arehighlighted in Exhibit 2 (page 14).

Together, these developments point toward astep change in digital channels, which prom-ise to create opportunities on three levels oftransaction banking service delivery: salesand channel access (anytime, anywhere ac-cess across integrated channels); data ana-lytics (leveraging data from internal, publicand third-party sources to gain client-specific insights into sales leads, emergingproduct needs and improved service levels);and processes (including the reduction orelimination of manual intervention in opera-tions and the adoption of agile solutions de-velopment, where solutions prototypes arelaunched within a matter of weeks to reapthe benefits of live market testing early inthe development cycle).

Digitization also poses new risks of disin-termediation. For instance, a cornerstone ofthe traditional correspondent bankingmodel is banks’ exclusive access to interna-tional networks for cross-border clearingand settling. However, third-party platformsare making it possible for banks, non-bankfinancial institutions, payments processorsand other organizations to customize cross-border services in ways that go beyond theoptions offered by traditional correspondentbanking arrangements. Ripple Labs, havingdeveloped a real-time, cross-border openpayment protocol based on recent crypto-


Gradual yet steady improvements inindustry standards and platforms

strengthen the impact of digitization,enabling banks to automate processes

and integrate systems.


Trade finance Supply chain finance Cash management

New industry standards

Multi-bank account management(e.g., EBAM)

Trade messages for corporations(e.g., SWIFT MT 798)

Multi-bank industry utilities for KYC operations (e.g., Accelus, SWIFT KYC, Markit ISDA)

Global clearing providers (e.g., Earthport, GlobalCollect)

Paperless trade instrument with third-party clearing(e.g., BPO/TSU)

Cloud-based multi-bank trade platform(e.g., Bolero)

Cloud-based multi-bank SCF platforms(e.g., OpenSCI, Orbian, Ariba)

Real-time cross-border open payments protocols (e.g., Ripple)

Potential “game-changer” for TB business

Emerging third-party platforms

Multi-bank authentication and profiling (e.g., 3SKey)

Source: McKinsey Global Payments Practice

Exhibit 2

New standards and platforms improve connectivity and interoperability

Offensive moves Defensive moves

Acquire new clients from geographies not covered on a stand-alone basis

Avoid churn in portfolio by filling critical gaps in current product offering and geographic coverage

Deepen client relationships

Expand own offeringDifferentiate through shared investments in new products and services

Optimize profitability by sourcing low-margin products and providing high-margin products as respondent

Optimize product and service offering

Reduce the number of partners to a close circle of trusted and complementary banks, thus minimizing complexity and risk

Mitigate country and corporate risks through partnerships with institutions that have deep knowledge of the targeted region or sector

Reduce complexity and risk exposure

Build a solid market position in countries that are relevant to the bank with minimal set-up and operating costs

Increase overall scale/volume on platforms, benefiting from economies of scale and efficiency

Broaden network and gain scale


Exhibit 3

Partnership and cooperation models must serve clear strategic objectives

currency technologies, is an example ofthese new types of third-party platforms.Such innovators allow financial institutionsto streamline and improve the service levelsand costs of critical steps in the correspon-dent banking infrastructure, such as mes-sage routing and settlement. The speed atwhich new entrants are evolving, as shownby Ripple’s recent partnership announce-ment with Earthport, increases the potentialfor a significant disruption within the indus-try. (See page 19 for an interview with Rip-ple Labs CEO Chris Larsen.)

As a consequence of these structural trends,banks are rethinking which markets theywant to compete in and how to serve tar-geted segments and geographies with dis-tinctive products and service levels. Incrafting their strategy for market coverage,they focus on four main objectives: deepen-ing relationships, optimizing products andservices for competitive distinction, reduc-ing complexity and risk exposure, and iden-tifying markets that are important to theirclients and where they can grow at scale(Exhibit 3).

Four models of bankingpartnerships

In order to maintain stronger control overrisks and costs while also extending geo-

graphical reach, transaction bankingproviders are devising new approaches to co-operation. Whether the objective is prima-rily aggressive (that is, to expand marketshare) or defensive (to protect existing rela-tionships), four distinct partnership modelsare emerging: regional-to-local agreements,inter-regional agreements, global-to-re-gional agreements and white-labeling (Ex-hibit 4, page 16).

Regional-to-local agreements

Regional institutions enjoy the broadestrange of options for partnering, whether themain objective is offensive or defensive. Aregional leader may partner with a localchampion where the local institution hasdeep penetration and relevance in replacingmultiple existing correspondent bankingagreements.

On the local champion’s side, these agree-ments aim to streamline the number of cor-respondent relationships, reducingcomplexity and risk exposure, mainly forthe purposes of traditional trade financerather than supporting international treas-ury operations. On the regional leader’sside, these agreements allow access to newmarkets (in particular to serve SMEs) withlimited upfront investments and capital al-location. It is important to note that servicelevels in this model typically will not exceedthose offered in correspondent banking,and the primary objective of this model isto defend relationships that may be tar-geted by aggressive competitors. Further-more, these relationships may becomevulnerable if the regional player does notkeep up with clients’ evolving needs forboth broader geographic scope and digitalcapabilities at competitive pricing.


To maintain stronger control over risksand costs while also extendinggeographical reach, transaction

banking providers are devising newapproaches to cooperation.


Local players have a natural advantage inknow-your-customer and access to liquidityand should exercise this advantage thought-fully, weighing not only evolving client needsbut the long-term strategic benefits of part-nering with either a global champion or re-gional leader.

Inter-regional agreements

Inter-regional agreements are peer-to-peerpartnerships between regional institutionsthat do not compete with one another, andtherefore can complement one another’sstrengths in two separate regions (e.g., CentralEurope and the Nordics or China and Africa).

Pursuing a strategy for aggressive growth,two regional institutions may reap largeeconomies of scale by linking their networks

or building shared technology platforms. Ascase studies in the airline and automotive in-dustries show, this type of deep strategic al-liance can be extremely successful. If theobjective is primarily defensive, inter-regionalarrangements typically involve light integra-tion of IT systems to leverage common stan-dards and raise service levels, enabling eachbank to strengthen relationships that mightotherwise be lost to global players. However,these lighter, defensive partnerships usuallydo not bring substantial new revenue andmay falter if either partner does not stayabreast of market expectations and techno-logical advances. A more aggressive playhowever, including deeper integration andpotentially exchange of human capital, typi-cally allows for further cross-fertilization ofeach bank’s customer base.

Regional-to-local agreements

Local Italian large corporate

Italian local champion

Regional leader with broad APAC

presence

Global-to-regional agreements

Multinational with HQ in North America and operations in Africa

Global powerhouse

without presence in Africa

Multiple local champions in

different African countries2

Inter-regional agreements

Multinational with HQ in North America and operations in Western Europe

MNC with HQ in Western Europe and operations in North America

Regional Leader in North America

Regional Leader in Western Europe

White-labeling

Local Turkish mid corporate

Turkish local champion

without eFX capabilities

Global powerhouse

with presence in Turkey

Partnership1 Primary relationship Secondary relationship

1 Direction of arrow indicates flow of services; each slash indicates a space where a technology partner can add value (as partner or challenger).

2 Or better, the global powerhouse might partner with a single regional leader with presence in multiple African countries.


Exhibit 4

Four models of bank partnerships for global, regional and local institutions, with varying breadth and depth (illustrative)

Global-to-regional agreements

Global institutions with networks spanningmultiple regions have a proven value proposi-tion for serving multinational corporations(MNCs). This is no reason for complacency,however. Indeed, a global bank’s objectives informing a partnership with a regional institu-tion or a number of local champions may beto defend relationships from a new and far-reaching global alliance between two regionalleaders. Alternatively, an aggressive partner-ship strategy might aim to undercut a globalor regional competitor. Seamless service(based on deep systems integration) andtransparency are competitive advantages.

However, these arrangements are costly, re-quiring ongoing investment in systems inte-gration and platform connectivity, and thebusiness case can be difficult to justify. In-deed, cost grows almost proportionally tothe number of countries covered; exponen-tially if the bank partners with a differentlocal player in each country rather than asingle regional player.

Whether for aggressive or defensive reasons,partnerships will likely account for a grow-ing share of business for each global power-house, and it is vitally important to selectpartners with care according to a globalcompetitive strategy to extend reach andmaintain distinctiveness.

White-labeling

Global and regional players with a techno-logical edge continue to provide specificproduct capabilities to local champions,which is a way to leverage scale on their ex-isting platforms. In practice, however, thesearrangements involve a high degree of tech-nical complexity. In addition, they will likelyrequire significant upgrades (transparency,analytics and digital access) in order to re-main attractive and competitive. The risk ofcannibalization by the in-sourcing partner isrelatively high.

Technology specialists have an importantrole to play both in building internal plat-forms and establishing seamless interfacesbetween institutions and clearing and set-tling networks. Technology firms such asRipple Labs, Earthport and third-partysupply-chain finance platforms may act ascompetitors as well as partners, particularlywherever there is an interface between cor-respondent banks. Furthermore, the non-bank provider of cross-border clearingservices may appear to be highly attractive tothe smaller partner, as there is no risk ofcannibalization.

Five critical success factors

New partnership models in transactionbanking will have a deep impact on a bank’sinternational operating model, and shouldthus be part of the CEO’s strategic agenda.Partnerships must be carefully aligned withthe competitive strategy of each partner andwith an overall plan for partnerships withbank and non-bank entities. Indeed, de-pending on the institution, technology part-nerships may play a more significant role inachieving competitive distinction than cor-respondent banking arrangements. Five


New partnership models in transactionbanking will have a deep impact on abank’s international operating model,and should thus be part of the CEO’s

strategic agenda.

major factors for success for evaluating po-tential bank and non-bank partners are aclear strategy, a strategic fit, a harmonizedclient experience, integrated platforms andprocesses, and aligned incentives (Exhibit 5).

* * *Market and regulatory pressures dictate thatbanks take a new look at the role that part-nerships play in overall business strategy.The traditional examples of correspondentbanking have become too complex and risky,and they inhibit banks from providing thecapabilities their transaction banking

clients demand. Proactive banks will take asystematic and iterative approach to restruc-turing their correspondent banking relation-ships and non-bank partnerships, startingwith a review of current partnerships, thesetting of strategic priorities, and a robustpartnership strategy governing each party inthe alliance.

Alessio Botta is a principal in the Milan office,

Steve Krieger is an associate principal in the

Luxembourg office, and Raffaela Ritter is a

principal in the Vienna office.


Clear perspective on needs to be fulfilled by the partnership, in particular:

- Which customers will we serve?

- What do we need to serve them?

- What are the expectations of those customers?

Complementary footprint and client base

Cultural compatibil-ity, shared legal background and trust between partners, often established through successful historic business relationship

Harmonized customer experience regardless of which institution is actually providing the service, typically defined through SLAs

Right-sizing the services provided to satisfy the needs of customers within a predefined scope (geographies, products)

Common/compatible legal jurisdictions

Integrated platforms and processes, enabling a harmonized customer experience

Clear reporting and governance structure to resolve issues and track benefits

Financial incentives, (e.g., exchange of equity stakes, smart/ transparent transfer pricing, co-investments)

Where high level of integration is needed: operational incentives (e.g., exchange of staff), transfer pricing

1Clear partnership strategy

2Strategic fit of partners

3Harmonized customer experience

4Integrated platforms and processes

5Aligned incentives


Exhibit 5

Successful partnerships meet five criteria

Toward an Internet of Value: An interview with Chris Larsen, CEO of Ripple Labs

Chris Larsen is co-founder and chief executive officer of Ripple Labs, a soft-ware firm that developed and continues to support the open-source Rippleprotocol. Ripple, in Larsen’s words, is like a “giant global ledger” that enablesthe exchange of value and confirmation of transactions. In Larsen’s view, tech-nologies like Ripple will have an immediate impact on the correspondentbanking landscape, but will also serve as the necessary foundation for the emer-gence of an “Internet of Value.”

McKinsey on Payments sat down with Larsen at the Ripple Labs offices in SanFrancisco to talk about the genesis of Ripple, the nuts and bolts of the protocol,and the near- and longer-term potential for change.

McKinsey on Payments: Chris, can we start with a description ofRipple and the problems it’s seeking to solve?

Chris Larsen: The Ripple protocol is an open-source distributedledger. It is currency-agnostic, and can confirm transactions inabout five seconds. You can think of it as a giant global ledger thatholds balances of different things of value and then allows forthose things of value to be exchanged using a path-finding algo-rithm route, similar to how youmight route packets of informationon the Internet. Those are the twobig things that the Ripple protocoldoes: confirm financial transac-tions without a central operatorand then path-find the most effi-cient way to exchange value, orsaid another way, execute a cur-rency trade.

That’s the Ripple protocol. We area software company called RippleLabs that contributes code to theprotocol and builds tools for fi-nancial institutions to use it. I’mthe CEO of Ripple Labs. Impor-tantly, Ripple Labs does not ownthe Ripple protocol. The protocolis a public good, essentially, andis open-sourced and distributed,and would exist even if RippleLabs did not.

We see both near- and long-term use cases for the technology. Inthe near-term, we see Ripple as a viable alternative to correspon-dent banking. Payments today are slow and expensive becausethere is no global rail for moving value. There is a series of re-gional, closed-loop systems, and correspondent banking linksthese systems together. It works, but correspondent bankingcomes with high costs in the form of risks, fees, liquidity and timedelays. To the point of risk, because it’s a chain of links, transac-tions fail often, and there’s no end-to-end transaction visibility.Liquidity costs tie up banks’ working capital because they have to

prefund accounts at the correspondent banks, and foreign ex-change isn’t competitive.

A distributed system like Ripple enables real-time, bank-to-bank,cross-currency payments while minimizing all these costs. On Rip-ple, banks can move value without putting up capital with a corre-spondent bank, without paying fees, with end-to-end transactionvisibility, and moving value in seconds instead of days. And very

importantly they benefit from astructural change in the way FXworks. Instead of relying on asmall handful of global moneycenter banks for foreign currencyexchange, Ripple provides a com-petitive marketplace for liquidityprovision. Market makers fromWall Street to London and HongKong compete to earn spread. It’sa whole new opportunity for mar-ket making, providing liquidity forglobal payments.

MoP: And the longer-term usecase?

CL: We believe that the Rippleprotocol represents the beginningof the “Internet of Value”—the“Value Web”—in which exchang-ing value will be as easy as ex-changing information today on the

web. We’re focused on the near-term use case because we thinkthe first users should be the custodians of value—banks, financialinstitutions—just as the custodians of data (academic institutions,governments) were the first users of the Internet.

We expect to see a dramatic increase in the volume of payments.By reducing the cost of payments to practically zero and increasingthe speed of payments to real-time, we expect the Internet of Valueto give rise to a dramatic increase in the volume of payments, andinnovation in payments. The Internet drove the same outcome forinformation sharing – think of the volume of information we share


“In the near-term,we see Ripple as aviable alternativeto correspondentbanking.Payments todayare slow andexpensivebecause there isno global rail formoving value.”

daily via the web, and the entire new industries and innovationsmade possible by the Internet.

MoP: Historically, systems that move value, particularly

correspondent banking, were designed to manage risks of various

kinds—counterparty risk, anti-money laundering risks, et cetera—

and much of the friction, some might say, arises from the need to

manage those risks. If you contemplate an Internet of Value that is

nearly frictionless, how do you think about the Ripple protocol in

the context of risk management?

CL: Very importantly, we see Ripple as infrastructure technology

that works with existing financial institutions, networks, messaging

standards, rule sets, consumer applications, et cetera. Distributed

payments technologies are fundamentally changing how payments

work in terms of speed, reach, security and cost-efficiency. But the

technology has to pair with banks’ risk management and compli-

ance systems. For example, Earthport is integrating Ripple with its

proven, robust compliance framework that banks around the world

already use.

MoP: Taking a step back, can you tell me how Ripple got started?

CL: The technology was started by early Bitcoiners who felt thatBitcoin’s confirmation method, mining, was wasteful because it requires a lot of computing power and thus burns a lot of electric-

ity. Ripple’s confirmation method, consensus, confirms transactions

or the current state of a distributed ledger without requiring a lot of

computing power.

The primary objective of Ripple’s design was to create a viable pay-

ment system. So this new method of confirmation also yielded the

important capabilities of real-time settlement and the ability to

transact across currencies. In Bitcoin, you can only move around

bitcoins. On Ripple, users can transact across any currencies, like

dollars to euros or yen.

MoP: How do the mechanics work? Is currency converted to the

Ripple protocol for transportation, and then reconverted to another

currency?

CL: Yes, that’s correct. A bank creates a copy of its ledger on Rip-ple, and continues to keep collateral on its existing ledger. They se-

lect which other banks, networks, and market makers with whom

they want to have relationships. For a given trade order, Ripple’s al-

gorithm crawls all of the available offers amongst the banks’ rela-

tionships to find the lowest-cost, most efficient path. Ripple

consensus then settles the transaction.

Importantly, a bank doesn’t have to convert from fiat money to a

digital currency and then move the digital asset and then convert it

into another fiat currency. Banks continue to deal in the currencies

they’re used to and benefit from instant FX and settlement.

MoP: What are some of the challenges you see for Ripple, and for

the idea of an Internet of Value?

CL: With no central operator, the protocol has to run in a distrib-

uted fashion very efficiently and scale to support the world’s pay-

ments volume. With an Internet of Value, assume these

technologies will actually power potentially a billion times more

transactions than there are today.

The Internet of Value also requires bringing together the banking

world with distributed systems technologists. They don’t speak the

same language.

MoP: Different tribes with different languages.

CL: Absolutely. The timelines are different; the vocabulary is differ-

ent. We’re trying to marry a culture that deeply understands corre-

spondent banking, collection management, risk mitigation, AML

and KYC, with distributed systems, cryptographic keys and system

scalability. That’s a big challenge, but we think we’ve got a good

team to take it on.

On the regulatory side, the challenge is to educate regulators that

these protocols, far from being threats, actually provide better tools

for anti-money laundering compliance. With AML, you can reduce

investigations that might take six months to trace all of the inter-

mediaries, to immediately be able to trace all the counterparties

and degrees of separation.

MoP: Central banks are obviously key stakeholders here.

CL: We’re actively engaging with central bankers around the world

The technology offers a very real benefit for domestic real-time

21Toward an Internet of Value: An interview with Chris Larsen, CEO of Ripple Labs

settlement. Distributed payments has come along coincidentally

right at a time when central banks are calling for faster or real-time

settlement solutions.

MoP: On the technical front, one challenge mentioned frequentlywhen distributed ledgers are discussed is the question of “norecourse.” If a transaction has been settled, there’s no recourse.How would you think about that ina world where large amounts ofvalue are being transported onthese rails?

CL: It’s important. People won’tgive up the ability to complain tosomebody and reverse a payment.This goes back to Ripple’s positionin the payments stack: it sits atthe bottom, purely acting as tech-nology infrastructure. Paymentrules and networks, which are ex-pert at providing services to enactthose rules (like a Visa or Ameri-can Express), are necessary partsof the payments stack that workwith Ripple.

MoP: So the Ripple protocol wouldenable the value exchange, but thecontrol for something like recoursewould sit higher in the stack?

CL: Exactly.

MoP: Tell us about the journey of building Ripple Labs and how yougrow the company, sustain a technology culture.

CL: We’re very dedicated to being a technology company first andforemost. About two-thirds of our team is engineers. While sometimesconsumer companies get all the glamour, our mission—moving value

in the way that information already moves on the web—could have

a huge impact. And that’s what I think great tech talent is looking

for: how do I make an impact on the world?

Our core values are the foundation for our culture. They are: open,constructive, inclusive, and humble. Open, because we believe theInternet of Value will be open and we promote open standards.

Constructive is about building, not disrupting. Disruption is some-

thing you do to your enemies.

We aim to be inclusive, working

with regulators, banks, and mar-

ket makers from China, to Europe,

to the U.S. After all, the Internet of

Value will touch every corner of

the world when it takes hold.

Finally, we keep it in perspective.

We’re just building infrastructure.

The infrastructure will provide a

new foundation and give way to

entirely new types of innovation

further up the payment stack, like

with consumer applications.

We’re happy for Ripple to be to-

tally invisible to consumers.

MoP: Ten years from now, where

would you like the Ripple protocol

and Ripple Labs to be?

CL: We would like to be recog-

nized as a leader in distributed payments technology, and for hav-

ing helped develop standards for the Internet of Value. In ten years,

I hope we can feel proud that we contributed to a major turning

point in finance. We think we’ve reached a bright line. There’s no

turning back or putting the genie back in the bottle. The Internet of

Value is coming.


“We’re just buildinginfrastructure.The infrastructurewill provide a newfoundation andgive way toentirely new typesof innovationfurther up thepayments stack.”

23Faster payments: Building a business, not just an infrastructure

It’s about more than speed

In a recent article (“Transforming nationalpayment systems,” McKinsey on Payments,September 2014) we discussed the impor-tance of upgrading payments infrastructure tomake it both faster and more effective, saferand secure, with designs based on specific usecases. Since then, the United Kingdom andSingapore have continued to lead the way; theUK with further growth in its Faster Pay-ments system (see sidebar, page 27), and Sin-gapore with its G3 Immediate Payments.Denmark launched a real-time payments so-lution in December 2014, Australia and theUnited States are making steady progress to-ward modernizing their payments systems,and several other countries are developingstrategies for improving their systems.

In most of these countries, the banking in-dustry is expected to pay for the new real-

time clearing system. Banks must thus in-vest years and significant resources in up-grading their platforms and integratingwith the modernized system. The UK FasterPayments, for example, cost between £150million and £200 million to build and op-erate for the initial contract period of sevenyears (2008-2015), plus up to £50 millionfor banks to connect to the central infra-structure. Because of these costs, improve-ments to payments systems must facilitateinnovation and generate revenue streamsfor financial institutions.

Monetizing new payments systems

Financial institutions can monetize invest-ments in a faster-payments infrastructurein several major areas: new products andservices in both consumer and corporatepayments, increased loyalty and retention,and new customer acquisition. The exam-

Faster payments: Building abusiness, not just an infrastructureTo date, most discussions about building a “faster payments” system have

focused primarily on speed and “plumbing.” Even more important, however, are

the innovative products and services that an enhanced infrastructure will allow

financial institutions to bring to market. These new products and services—in

both consumer and corporate payments—can create new revenue streams and

help banks and other players realize a return on their investment in a

modernized payments system.

Rob Hayden

Grace Hou

24 McKinsey on Payments

ples provided in these areas are not com-prehensive but are meant to demonstratethe potential for innovation—and thus newrevenues—in a faster, modernized pay-ments infrastructure.

New products and services in consumerpayments

A faster, modernized payments system willaccelerate the convergence of mobile com-merce and consumer payments by enablingreal-time funds transfers that have value forboth merchants and consumers.

Person-to-microbusiness payments:Thus far, most innovation in the person-to-microbusiness arena has been on the frontend, with products that make it easier formicrobusinesses and small businesses to ac-cept payments (e.g., Square and PayPalHere card readers). A faster back-end infra-structure would further improve the con-venience of these apps. For example, in aused car sale today, a buyer usually givesthe seller a check, sends a costly wire trans-fer or carries a sizable amount of cash topay for the car. Faster-payments infrastruc-ture will enable car buyers to send a real-time payment to the car seller on the spot,and drive away in a new car without therisk of a bounced check or a cash theft, and

without the cost of a wire. (Taking the ex-ample even further, one could imagine asingle mobile app for the entire purchaseprocess: researching and identifying cars,finding local sellers and prices, and makingtest-drive appointments.)

Bill payments: A real-time infrastructurecombined with a ubiquitous merchant-biller directory—which would store andmanage electronic payment identities forbusinesses so that they could be paid elec-tronically—and integrated into mobilebanking applications could create a fric-tionless bill-payment experience involvingpush notifications, a single-button andreal-time confirmation of payment receipt.Consumers would have more control overtheir cash flow, a less costly and more convenient way to pay bills, and more certainty when making “consequence” payments (e.g., payments to restart a sus-pended utility service). The revenue oppor-tunity here is significant, as bill paymenttouches every household. In India, for ex-ample, 10 billion to 12 billion bills are paideach year, and in the U.S., over 20 billionbills are paid per year.

Online commerce: With retail e-commercesales worldwide forecast to grow to $2.5trillion by 2018, real-time payments infra-

Faster payments, defined

Faster payments may also be referred to as immediate payments,instant payments or real-time payments. While faster payments

have been defined in various ways, in this article we refer to them

broadly as the modernization of payments clearing systems to in-

clude a “faster” component. Included in our definition are “domes-

tic, inter-bank electronic payments systems in which irrevocable

funds are transferred from one bank account to another, and where

confirmation back to the originator and receiver of the payments is

available in one minute or less” (Clear2Pay). The most important

features of these systems are real-time (or nearly real-time) clear-

ing and availability of funds.

May 2015


structure can pave the way for new prod-ucts and services based on nearly immedi-ate delivery of online purchases. Sincegoods are typically released when a pay-ment is received, real-time payments canenable real-time shipment and delivery.Online technology and e-commerce playerssuch as Amazon and eBay are already mov-ing toward faster and faster delivery; real-time funds transfer and availability canenable more merchants to do the same—with comparable payment speed and im-proved risk management. A new, real-timeclearing system should enable more retail-ers to match the standard that offeringslike Amazon Prime have set, thereby in-creasing customers’ choices and furthering

the shift toward mobile commerce. Finan-cial institutions thus have the opportunityto provide improved e-commerce paymentsservices to consumers and merchants. Asan example, iDEAL in the Netherlands, an e-commerce payments system based on on-line banking, enables consumers to makereal-time, lower-cost payments by directlytransferring funds from their bank accountto merchants.

New products and services incorporate payments

As with consumer payments, a faster infra-structure alone is insufficient for creatingvalue in corporate payments. However,banks can use that infrastructure to buildvaluable, next-generation payments tools forcorporate customers that offer the sameease-of-use, simplicity and customer experi-ence found in today’s emerging mobile anddigital payments technology for consumers.

Just-in-time payments: Real-time pay-ments allow businesses to control whenpayments are made and to increase theircertainty. Real-time payments are mostsalient for one-time, lower-value, business-to-business payments, which account for anestimated $11 billion in payments volumein the U.S. alone, according to McKinsey’sGlobal Payments Map. Particularly forsmall businesses that need to tightly man-age cash flow, faster clearing with real-timenotification of payment would offer a wayto avoid late payments and adopt just-in-time business models. For example, retail-ers might be able to reduce their inventorylevels, since immediate payment receiptwould enable immediate shipment of or-ders. Moreover, real-time payments maycreate a need for corporate customers tomanage their intra-day liquidity moreclosely. Banks could generate additionalrevenue by offering liquidity managementservices such as intra-day loans or over-draft protection.

Direct deposit for temporary and hourlyworkers: In the U.S., the current ACH Di-rect Deposit system requires a transactionto be initiated at least 24 hours in advance.Consequently, many businesses have

Real-time payments may create aneed for corporate customers to

manage their intra-day liquidity moreclosely. Banks could generate

additional revenue by offering liquiditymanagement services such as

intra-day loans or overdraft protection.


drifted away from direct deposit towardprepaid cards. A faster payments systemwould allow more businesses to pay weeklyworkers through direct deposit. Given that17 percent of workers in the U.S. are tem-porary employees, the potential savings issignificant.

Automated e-invoicing solutions:Enhancements to payments clearing sys-tems could allow for new remittance datasolutions that digitize the back office forbusinesses. While payments system mod-ernization is not essential for e-invoicing, it

can be a catalyst for improved business-to-business e-invoicing solutions. For exam-ple, Australia’s New Payments Platformaims to provide more information-richtransactions by enabling commercial over-lays on top of the basic invoicing infrastruc-ture. It would then be possible to developproducts and services that automate e-in-voicing along the entire procure-to-payvalue chain, thus pushing the industry torealize the potential of e-invoicing. Con-verting invoices from paper to electronicyields a cost savings of up to about 70 per-

Poland’s Express ELIXIR

The Polish national clearing house, Krajowa Izba Rozliczeniowa S.A.

(KIR), introduced Express ELIXIR in June 2012 after market research

revealed high demand among end-users for real-time payments.

Supporting credit-push transfers with real-time clearing and settle-

ment, Express ELIXIR transactions are processed separately from

the batched ACH payments system, ELIXIR (also operated by KIR).

Express ELIXIR has yet to achieve widespread adoption, however,

processing fewer than 1,000 transactions per day on average. (By

contrast, Singapore’s FAST system processed over 33,000 transac-

tions for over S$64 million in its first two days of operation.)

The reasons behind the tepid rate of adoption can serve as lessons

for other faster payments systems:

• Low bank participation: With only eight to ten banks out of about

50 participating, the service lacks the ubiquity necessary to scale

across end-users. The UK’s Faster Payments system and Singa-

pore’s FAST system, meanwhile, have the participation and in-

vestment of all major banks.

• Lack of value-added products and services: At launch, Express

ELIXIR’s participating banks had not developed payments solu-

tions that leveraged its infrastructure. Without innovative prod-

ucts and services that create seamless customer experiences,

adoption is likely to remain low.

• Weak differentiation from legacy ACH system: The legacy ELIXIR

system completes transactions at a relatively high speed, with

three cycles of settlement per day and funds availability within a

few hours (i.e., same-day ACH). Consequently, end-users are less

likely to see significant added value in the faster payments sys-

tem, particularly when the Express ELIXIR is priced at a premium

compared to the legacy ELIXIR.

• Alternative faster payments options: Intense competition in the

Polish payments space means that end-users have access to

cheaper payments options—such as Blue Cash, which began as

an e-commerce solution but has since expanded into a more

widely used payments system in Poland.

Despite these challenges, adoption is likely to grow in the coming

years, as major Polish banks are developing mobile payments solu-

tions that will leverage Express ELIXIR. Additional services are

planned for layering on top of the payments system, including a P2P

mobile service with the use of alternative identifiers. Ultimately, the

experience of Express ELIXIR illustrates the importance of building

a business, not just an infrastructure, around faster payments.


cent per invoice; the value of automated in-voicing, then, is indeed significant.

Strengthening customer relationships

Person-to-person payments: Person-to-person (P2P) payments products and serv-ices enabled by a faster paymentsinfrastructure could play a critical role inbanks’ efforts to strengthen and retain ex-isting customer relationships. This is par-ticularly relevant today, as the space isunder siege by non-banks. Emerging pay-ments players such as PayPal, Venmo, Al-ibaba’s Alipay, and Tencent’s WeChat haveused P2P payments to gain a user base foradjacent services, particularly e-commerce.Large technology players such as Apple,Google and Facebook are working on their

own P2P solutions as they seek to intensifytheir engagement with existing customersand solidify their control over the mobilecommerce experience.

A real-time payments system would allowbanks to offer a P2P product that providesimmediate funds availability—somethingnot widely available today, and a servicethat younger consumers are coming to ex-pect. The product should be simple andeasy to use, allow end-users to choose apayments speed, and be supported by aP2P identity directory that stores users’payment information and enables ubiqui-tous payments across banks. Banks thatoffer a product with these features couldretain and increase their current cus-

The UK’s Faster Payments

With the launch of its Faster Payments service (FPS) in May 2008,

the United Kingdom initiated the global shift toward faster payments.

This real-time clearing infrastructure includes 10 member banks,

and enables phone and Internet payments through a continuous,

real-time clearing system. Payments take one of four forms: single,

immediate payments; forward-dated payments; standing-order pay-

ments; and direct-corporate-access payments.

Single, immediate payments are the primary use case, and grew 40

percent CAGR from 2009 to 2014, reaching 8 percent of transactions in

2014. Over 90 percent of transaction accounts in the UK can receive

FPS payments. Banks generally do not charge consumers for sending

payments through the system, but they do charge corporate customers.

Since 2012, participating banks have been building customer-facing

products and services that leverage FPS. Barclays Pingit, for exam-

ple, enables users to send and receive payments using a mobile

number. More recently, the system has expanded to allow customers

to purchase and use bus tickets through their smartphones, and to

send and receive electronic gift cards using mobile payments.

Launched in April 2014, the UK Payments Council’s PayM service

enables customers of 16 participating banks to send and receive

payments using a mobile number as a proxy. Some banks, such as

HSBC, have extended PayM to business customers as well.

Another mobile payments service that leverages the Faster Pay-

ments service infrastructure is Zapp, which is expected to launch

this year. Zapp is owned by UK banks and can be integrated into ex-

isting mobile banking apps so that users can make in-store and on-

line purchases through mobile devices.

These innovations demonstrate the ability of a back-end, real-time

clearing system to facilitate products and services that create value

for customers and enable banks to compete more effectively against

non-bank financial service providers. How widely adopted these

products and services will be, and how banks will monetize them–

whether through direct fees or through increased customer engage-

ment and cross-selling opportunities–is still an open question.


tomers’ engagement, slow the shift in mar-ket share toward third-party providers, andcreate new revenue streams in digital fi-nancial services.

Acquiring new and previouslyunderserved customers

A modernized payments infrastructurewould also enable banks to better meet theneeds of “underbanked” consumers. Ap-proximately 18 to 25 percent of the 25 mil-lion underbanked consumers in the U.S. saythey use non-bank/alternative financialservices providers because they are faster.The ability to receive payments and usefunds in real time could help banks winshare among these customers. With the un-derbanked segment spending $89 billionjust on interest and fees for alternative fi-nancial services, the value at stake in theU.S. alone is high.

Furthermore, the prevalence of mobilephones and mobile financial services amongunderbanked consumers suggests that themobile channel could be a cost-effective wayto scale distribution of mobile paymentstools built on a faster-payments infrastruc-ture. New products and services could be de-signed specifically to bring segments of the

underbanked into the mainstream bankingarena; for example, small-dollar, immediateloans could be provided in near-real-timethrough text notification. A number of start-ups are already attacking this space; for ex-ample, Affirm enables merchants to offercustomers instant lines of credit for pur-chasing items on their sites.

Infrastructure is only the beginning

While some existing revenue streams (suchas paper-based services) will no doubt beimpacted by a modernized system, the dig-itization of information, the rise of mobilecommerce, and end-users’ rapidly chang-ing expectations all create the opportunityfor banks to boost customer engagement,gain a greater share of wallet, and acquirenew customers.

New revenue streams will be the primarysource of return on investment in a mod-ernized payments infrastructure, but it isworth noting that additional cost savingscould be significant if banks seize this op-portunity to integrate their payments ar-chitecture. Some banks may gravitatetoward payments hub architecture, whichhelps usher innovation into production—and thus to expedite revenue growth.Often, however, it is more cost-effective forbanks to integrate payments platformsthrough multiple, smaller integrationpoints, such as the fraud management sys-tem or the transaction banking system.Based on case examples from around theworld, McKinsey estimates that banks canreduce their payments-related IT spendingby 20 to 30 percent when they integratetheir payments architecture.

To capture the monetization opportunitiespresented by a modernized payments sys-

To capture the monetizationopportunities presented

by a modernized payments system, financial institutions

must relentlessly focus on design, customer experience,accessibility and convenience.

tem, financial institutions must relentlesslyfocus on design, customer experience, acces-sibility and convenience. Building the infra-structure is a necessary condition forsuccess, but banks will need to strengthentheir front-end product development capa-bilities in order to fulfill the new system’s

potential. If they do, the investment in fasterpayments will be well worth the return.

Robert Hayden is a senior expert at GC Insights, a

wholly owned subsidiary of McKinsey & Company.

Grace Hou is an associate principal in McKinsey’s

San Francisco office.



In the next issueThe next issue of McKinsey on Payments coincides with the 2015 Sibos conference to beheld October 12 to 15 in Singapore. The issue will include articles on the following topics:

Supply-chain finance

An overview of structural factors shaping the supply-chain finance market, includingglobalization, technology improvements and network effects, and a view on how to capturethe opportunity.

Mobile payments

New McKinsey research sizes the mobile payments opportunity, and presents insights on how players along the mobile value chain can use segmentation to improve theirperformance.

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