October 2015Volume 8, Number 22

McKinsey on Payments

Foreword

Payments in Asia: At the vanguard of digital innovationDigitization of business processes and the emergence of new platforms for paymentsand finance bring both challenges and opportunities to payments businessesoperating within Asia or serving clients who trade with Asia.

Supply-chain finance: The emergence of a new competitive landscapeFintechs are changing how buyers and suppliers think about the supply-chain financemarket, and starting to command a sizeable proportion of the value pool.

16 in 2016: Trailblazing trends in global paymentsA look at the topics that are top of mind for global payments executives, from EMVmigration to the battle for the “digital customer.”

Digital wallets in the U.S.: Minding the consumer adoption curveDigital wallets seem poised to enter the mainstream. Now is the time for providers toidentify which strategic market approaches will lead to success.

The new rules for growth through customer engagementFor banks, digital engagement with customers has become an imperative forpreserving relationships. Five rules can help them thrive in the digital landscape.

No time for U.S. bank complacency over liquidity compliance Basel III’s liquidity coverage ratio is no cause for panic for U.S. commercial banks.However, banks should not wait to define their strategic approach to the regulation.

The Singapore payments industry at a glance

1

3

10

17

26

32

39

46

32 McKinsey on Payments October 2015

Second, the explosion of information andtransparency has altered the decision jour-ney in consumer financial services. Sites likeCredit Karma, NerdWallet and Bankrateequip consumers to make borrowing, de-posit and rewards program decisions in fun-damentally different ways. Meanwhile,consumers’ increasing comfort with mobileand Web channels and the efficacy of onlinemarketing opens consumers to a wider arrayof bank and non-bank suitors. Technologiessuch as Uber and Apple Pay are integratingpayments within the customer journey,

raising consumer expectations for a seam-less experience. This moves us closer to the“retail nirvana” of frictionless payments,and furthers change in the banking andpayments ecosystem.

Third, the rise of cloud-based services anddata center investments by tech players(including Amazon, Google and Microsoft)combined with improved tools for dataanalysis and insights is driving low-costdata availability. This third shift enablescompanies to react to customer behaviorin real time, delivering a more fulfilling

The new rules for growth throughcustomer engagement

Ongoing change in the banking and payments ecosystem has been well docu-

mented. McKinsey expects that the next three to five years will bring more

change to the consumer financial services landscape than has been seen in the

last decade, driven by three primary trends. First, the flows of investment

funds continue to support innovation. Global investment in financial technol-

ogy, or “fintech,” reached over $12 billion in 2014, increasing at more than

three times the rate of overall venture capital investment. These largely non-

bank fintech players leverage digital distribution channels to enhance cus-

tomer experience and drive rapid customer acquisition and engagement.

Although the long-term viability of many of these new providers remains to be

seen, their lower cost structures and aspirations to “disrupt” the landscape will

accelerate change (Exhibit 1).

Brian Gregg

Grace Hou

Zamir Lalji

Xiulin Shen

experience. For example, startups like Af-firm in the U.S., Klarna in Sweden andPaidy in Japan use data to offer instantcredit for online purchases.

The foregoing trends are likely to acceleratein the near-term. As a result, incumbentconsumer financial institutions need toquickly position themselves to compete in adigitally enabled environment.

The new rules of consumerfinancial services

We are living in what Target chief marketingofficer Jeff Jones has dubbed The Age of Im-patience, in which “one of the greatest ex-pectations our guests have is to shop andengage wherever and whenever they want.”Over the course of the past decade tech play-ers have forced retailers to accelerate their

digital strategies, transforming their physi-cal stores into leaned-out strategic compo-nents of a broader, multichannel customerengagement approach. Similarly, for banks,digital engagement with customers has be-come an imperative to preserving existingrelationships, let alone growing customervalue. McKinsey sees five rules that financialinstitutions need to embrace in order tothrive in the new landscape:

1. Be where your customers are—develop anintegrated multichannel presence

2. Publish like the news media—deliver con-tent at an hourly pace

3. Personalize the experience—increase rele-vance with targeted and dynamic content

4. Act like a venture capitalist—buy andpartner for new capabilities

33The new rules for growth through customer engagement

62 Consumer (retail)

10

27

Breakout of the 62% consumer banking innovations

Percent of start-ups and innovations by customer segments2

Share of global revenues

Small andmidsize enterprises

Checking anddebit accounts

Savings andinvestments

Lending andfinancing

Paymenttransactions

10%

13%

14%

25%

7%

15%

24%

6%

52%

Large corporationsand institutions

1 Analysis based on commercially well-known cases registered in the Panorama database; might not be fully representative.

2 Sample size exceeds 350; Figures do not sum to 100%, because of rounding.

Source: McKinsey Panorama, a McKinsey Solution

Exhibit 1

Fintech innovations are targeting the consumer banking segment1

34 McKinsey on Payments October 2015

5. Execute like a tech company—drive rapidpilots to test and learn at scale

1. Be where your customers are

Today’s consumer decision journey is an iter-ative process of consideration, evaluation,purchase and experience across online andoffline channels that is more dynamic thanthe “funnel” model of the past (Exhibit 2).This means banks and payments playersneed to grow their presence on desktop,Web, tablet, mobile and social media as wellas their marketing across display, paidsearch, search engine optimization, social,affiliates and email. While banks and creditunions are already shifting budgets awayfrom traditional channels (eMarketer fore-casts an 11.7 percent growth rate in digitaladvertising budgets among U.S. financial in-stitutions), the share of marketing spend ondigital still lags the 47.1 percent share of timespent per day by U.S. adults on digital media.Retailers often see increases in spending ofthree to six times for cross-channel cus-tomers versus single-channel customers. In

McKinsey’s experience designing multichan-nel strategies in payments, we have seenoverall increases in spend of at least twotimes for customers using both mobile appsand branches versus branches alone.

More than just establishing a digital pres-ence, financial services firms need a near-real-time, single view of consumer behaviorand actions across products and services,household accounts and channels. This en-ables consumer-cue-based marketing todrive optimal engagement. One paymentsprovider achieved a three-fold increase inincremental transactions by implementing anear-real-time (within an hour) “abandonedpayment” campaign that increased captureof consumer intent to make a transaction. Inanother example, PNC Bank in the U.S. useda data hub of customer information acrossmultichannel interaction points to equip callcenter agents with the most relevant mes-sage to share with each customer.

2. Publish like the news media

Deepening consumer relationships requires a

From To

18.9 million 23.1 millionPeople discover new brands through social media

30% 52%Visit competitor’s site

61% 81%Go online before going to the store

7% 97%Major brands with multiple twitter handles1

Consider

Evaluate

Buy

Enjoy/Bond Source: Brandwatch;The Future of Commerce;

Forrester; iConsumer; Cisco; Nielsen, Strategy Analytics, eMarketer

Exhibit 2

A new, digitally driven consumer decision journey is emerging

35The new rules for growth through customer engagement

two-way, continuous dialogue, a steadystream of original, fresh and relevant contentconnecting consumers with the brand. In-stead of a few campaigns a year, financialservices players need to convey hundreds ofmessages a week, through blogs, videos, in-terviews, reviewer forums, photos and so on.One payments player built a library of offersand scored their effectiveness along multipledimensions to enable rapid deployment toappropriate customer segments (e.g., higher-value offers to higher-value prospects). Oth-ers banks have turned to customer-generatedcontent such as crowdsourced photos forcampaigns (First Direct in the UK) or re-views (Knab Bank in the Netherlands).

This approach requires both a complex con-tent management system and content supplychain to align millions of impressions acrossmultiple platforms. Each mobile coupon,email, Web page, text message and in-branch promotion must be coordinated sothat their messages are consistent and rele-vant. An electronics manufacturer discov-ered that a third of shoppers who researched

a specific TV brand online walked out oftheir stores during the “buy” phase, frus-trated by inconsistencies between productdata found online and in the store. Forbanks, given their “trusted agent” relation-ship with customers, poorly aligned offersare even more of a risk.

3. Personalize the customer experience

Increasing revenue through consumer en-gagement centers around the next action, notthe next product. As opposed to the tradi-tional product upsell mentality, optimal en-gagement relies on knowing what behaviorswill enhance the customer-bank relationship(e.g., app downloads, clicking to chat, re-deeming an offer, watching research videos),which may not always take the form of an-other transaction or product. Developing thisknowledge requires an understanding of con-sumer expectations by segment. The greaterthe shift from broad segmentation to mi-crosegmentation to one-to-one targetingusing customer data insights, the greater theimpact (Exhibit 3). Banks have only recentlybegun to tap into the potential of personal-

Level 1

Level 5

Level 4

Level 3

Level 2

Dynamic personalization

1:1 targeting across channels where customer is recognized real-time and treated differentially across all touch points

1-to-1

1:1 targeting and optimization where every customer receives a unique contact strategy by selecting “who what and how” according to each customer’s unique “DNA”

Micro-segmentation

Tailored contact strategy across many micro-segments by combing detailed behavioural segmentation with predictive models

Macro-segmentation

Differentiated contact strategy across several macro-segments across the customer lifecycle

Broadcast

Everyone sees the same message through mass communications

Source: McKinsey Payments Practice

Exhibit 3

Banks need to increase the level of personalization over time

ization; for example, the location-specificimagery provided by Chase’s mobile app orthe iGaranti app that enables customers tocreate a customized mobile app homepage.

Even without reaching one-to-one personal-ization by customer, however, significantrevenue impact can be achieved with tailor-ing by segment. A global card issuer facinggrowth challenges, high consumer churnand drops in engagement at early touchpoints revamped its onboarding process bydetermining behavioral customer segments.A distinct journey and contact strategy wasdeveloped for each segment based on datathat revealed the optimal sequence of ac-tions to drive the highest value (e.g., com-pleting a second transaction within the firstweek, using the card for purchases acrosstwo verticals). More than 50 pilots were thendesigned and executed to drive the desiredbehavior for each segment. Within weeks, asix percent lift in transaction volume wasachieved versus a control group.

4. Act like a venture capitalist

IT talent skilled in newer disciplines suchas agile development represent a severeconstraint for banks. Incumbent financialfirms have often adopted aggressive buy-or-partner approaches to start-ups, realizingthat building in-house capabilities can taketoo much time in a competitive market. No-

table examples include BBVA’s acquisitionof Simple, SunTrust’s acquisition of Light-Stream and Green Sky, and Capital One’sacquisition of Adaptive Path, a design firmproviding user interface/user experienceand agile development capabilities. Den-mark’s Danske Bank has taken a distinc-tively “tech” approach to its mobileperson-to-person rollout, focusing first onbuilding market share (reaching 40 percentpenetration of the adult population) beforepursuing monetization strategies.

Similar moves have been made by serviceproviders and established disruptors (e.g.,PayPal’s acquisitions of Paydiant, Braintreeand Venmo). The challenge is to time acqui-sitions to optimize the tradeoff betweenproof of concept and rich valuation. One so-lution is the incubator/portfolio approachtaken by firms such as FIS and First Data,which take minority stakes in a variety ofmid-stage companies.

5. Execute like a tech company

Increasing revenue in a digital world in-volves rapid execution of pilots, robustmeasurement and quick action on lessonslearned, optimizing subsequent iterationsand scaling quickly when a winner hits.Launch and release cycles must be far morecompressed than those to which banks areaccustomed. Tech titans like Facebook or-ganize into a thousand teams of ten ratherthan ten teams of a thousand in order to testthen rapidly scale pilots that demonstrateearly success. One payments provider foundthat two of the first 13 tests on its homepageincreased conversion by 10 percent from sitevisit to transaction or registration.

Financial institutions often cite regulatoryand compliance barriers to moving faster,

36 McKinsey on Payments October 2015

Tech titans like Facebook organize into a thousand teams of ten ratherthan ten teams of a thousand in orderto test then rapidly scale pilots that

demonstrate early success.

37The new rules for growth through customer engagement

constraints from which their tech-centriccompetitors are largely exempted. Butbanks can do more to enable faster testingand learning. For example, one issuershifted from a siloed compliance, legal andmarketing team to a cross-functional teamwith dedicated compliance and legal timeto support testing, three-day service-levelagreements on approvals, and fast-trackprocesses for tests within agreed uponguidelines. Another payments provider re-duced its conception-to-launch cycle foremail marketing from 30 days to 10 by cre-ating a small team with ownership of astreamlined end-to-end process.

How to get started

Banks acknowledge the importance of digi-tal engagement to drive revenue growth, butfrequently cite organizational siloes (e.g.,digital and retail) as well as lack of band-width or investment, as reasons for limitedprogress.

While concern over cannibalizing existingbranch business can make executing multi-channel strategies challenging, the overallvalue of an engaged multichannel customerexceeds that of “brick and mortar only,” asnoted earlier. Tactics to foster alignmentacross the organization include designing loy-alty programs that reward multichannel en-

gagement and evaluating teams based on anintegrated yardstick. For instance, creditshould be shared for customer acquisitionthrough digital and physical branch channels.Teams should also operate under shared goalsand metrics (e.g., mobile app downloads).

In addition, the beginnings of a digital rev-enue growth strategy need not entail a mul-tiyear initiative, major commitment ofinvestment dollars, or even a roadmap ad-dressing all five rules. Here are three ap-proaches to quickly establishing afoundation without significant organiza-tional commitment:

• Pick your spots. Select quick-hit opportu-nities with clear value and an existing de-gree of organizational enthusiasm. Thiscould be within one line of business orone customer segment. Design 10 to 20pilots to run within the next quarter andensure robust measurement via test andcontrol, to generate learnings and insightsto inform subsequent versions of eachtest. Fertile ground for experimentationincludes email marketing and mobilepush notification, which can be low-fric-tion ways to start consumer-cue-drivenengagement, leveraging a library of regu-larly-updated content and offers that arefresh and eye-grabbing; in addition, if anA/B testing tool is in place, starting with aregular cadence of tests to optimize thehomepage and landing pages yields highimmediate impact.

• SWAT up. Convene a group of six to eightenthusiastic participants to drive a set ofpilots, ensuring representation from keyfunctions; e.g., a marketer, product lead,developer, data scientist, designer andcompliance and legal leader. Create a

While concern over cannibalizingbranch business can make executingmultichannel strategies challenging,the overall value of an engaged

multichannel customer exceeds that of“brick and mortar only.”

38 McKinsey on Payments October 2015

“project thermometer” tracking two tothree targeted metrics, including a mix offinancial metrics (revenue per customer,transactions per customer) and engage-ment metrics (open rates, click-throughrates, time spent on site).

• Laser focus on results. Establish a warroom to review what worked and whatdidn’t, and what to do next, on a weekly orbiweekly basis. Then trumpet the resultsthroughout the organization when a win-ning test is found, whether it is an educa-tional email stream with significantincrease in the use of a product for testversus control customers, or an A/B testwith significant increase in conversion inthe registration flow, or an onboardingprogram resulting in increased transac-tions. Target specific customers ratherthan system-wide impact. Celebrate smallmoves of the needle rather than waitingfor a “big bang” unveiling after two years.

In pursuing the above tactics it is essentialnot to expect to get it right the first time.

The mindset shift in driving revenuethrough consumer engagement in a digitalworld is the power of incremental improve-ment—“every pixel matters” and the result ofhundreds of small tests and pilots that areoptimized and quickly scaled can deliver bigpayoffs. While the landscape is changingrapidly, and fintech players are competingfor consumer mindshare and loyalty, banksand other incumbent consumer financialservices providers that understand this andexecute on the five rules will be positionedfor growth.

Brian Gregg is a principal in the San Francisco

office, where Grace Hou and Zamir Lalji are

associate principals. Xiulin Shen is a specialist in

the Southern California office.

For information on McKinsey’s Panorama database

of more than 1,500 fintech innovations email

fintech@mckinsey.com or visit

www.mckinseypanorama.com/products-

services/panorama-fintech.aspx.