Digital Disruption in Payments

Innovation at the Speed of Digital

Payments has become the stage of a battle by press release

Two decades ago,

Bill Gates
described banks
as dinosaurs that
would be
bypassed by
innovative
technology. Yet
since then banks
have survived
challenges [].
Wall Street
Journal,
Jan 2015

Payments is a
huge business []
Weve created an
entirely new
payment process
Tim Cook,
CEO Apple,
Sep 2014

We particularly
are excited about
our payments
business in total.
We are going to be
very aggressive in
growing this
business, and we
will be
disappointed if we
dont announce
some exciting and
potentially marketchanging
ventures.

The Problem With

Apple Pay And
Samsung Pay Isn't
The Tech, It's The
Banks [] The
chatter around
mobile payments
has transformed
into arguably the
biggest story in
tech. And it's not
necessarily a
positive story.
Huffington Post,
Mar 2015

We are on a
collision course
with the Googles
and the Apples of
the world. Would
you ever pick a
fight with those
types of
companies? No,
but we are on that
course
Dave McKay,
CEO RBC; Mar
2015

Jamie Dimon,
CEO JPMorgan
Chase, Apr 2015
SOURCE: Press search

Payments has become is the epicentre of Fintech innovation

Distribution of Fintech activity

24%

14%

# of startups
and innovations as %
of database
total1

13%

12%

11%

8%
4%

3%

5%
2%

1%

2%

1 350+ commercially most well-known cases registered in the database, might not be fully representative
2 Includes small-, and medium enterprises
3 Including Large corporates, Public Entities and Non-banking financial institutions
4 Includes Investment Banking, Sales and Trading, Securities services, retail investment, mutual funds and asset management factory

SOURCE: McKinsey Panorama Fintech Database

 And represents a strategic part of a banks customer franchise

Annual income per digital customer1

Income sources per digital customer1

Indexed

Payment account

Indexed, Y+3

Y0

Y+1

Y+2

ESTIMATES

Savings

Investment products

Y+3

Mortgages

285

Customers
without
payment
account

140

120

105

65
53

100

X 1.6

X 2.5

32

X 2.7

105
5

15
Customers
with
payment
account

X 2.7

135
85
220

295

285
Customers without
payment account

Customers with
payment account

1 Illustration for annual income on direct bank customers based on ING Direct analysis
SOURCE: ING Direct investor presentations

Major disruptions are reshaping the Payments Ecosystem

Description
Next wave of regulatory intervention

Issuance of new rules and regulations is

accelerating, in particular in form of economic regulation
and new rules on data privacy, security and data access

A Margin pressure on
core Payments
services

Improved convenience, efficiency and value unlocked

through technology, e.g.
Integration of Payments into the considerevaluate-buy-bond value chain for consumers
Omnichannel & cloud-based solutions with
broader service offer for merchants
Digitization of the AR/AP value chain for einvoicing and data-rich solutions for B2B

B Increased
competition, both
from the banking and
non-banking space

Technology-enabled
evolution in user
behaviors

Payment network
infrastructures are
being enhanced
Payments security will
remain at the forefront,
more than ever before
Costly battle for
liquidity continuing

Induced changes for

banks

Over 22 markets around the world (incl. UK) are

upgrading national payments infrastructures to be
faster and more flexible, a.o. enabling micro-lending,
real-time P2P

Accelerating threat of cyberattacks is fueling demand

C Emergence of new
business and
operating models

D New systems and

solutions, calling for
investments in
innovation and
technology

for more secure, real time solutions

EMV, encryption, and tokenization are moving to the
top of executives agenda

While the battle for liquidity has been easing since the
crisis, the low interest rate environment is reducing
cross-subsidization from account balances

SOURCE: McKinsey Global Payments Practice

MARGIN PRESSURE ON CORE PAYMENTS SERVICES

A Interchange fees have been decreasing across Europe

Recent context

Evolution of interchange fees

Interchange fee (IF)

Debit fees (%) for average transaction of EUR 50

caps in place across

Europe since Jan. 15
(0.3% for credit, 0.2%
for debit); a ~60%
drop vs. current levels

Equivalent or
greater drop in
Merchant Service
Charges (MSC)
expected

Further pressure
foreseen through
opening for crossborder acquiring

0.19

0.18

0.18

0.44

0.42

0.42

0.10

0.18

CAGR
%

0.07

-9

0.07

-15

0.19

0.07

-3

0.47

0.41

0.07

-24

0.87

0.68

0.07

-24

1.50

1.40

2004

08

12

2015E

IF cap at 0.2% or 7 cents, whichever is lower

SOURCE: McKinsey Global Payments Practice

INCREASED COMPETITION, BOTH FROM THE BANKING AND NON-BANKING SPACE

B A wide variety of players could shape the competitive landscape in

payments going forward
Strategic objectives

Aim to generate transaction and liquidity revenues and to protect

Banks

Networks
and
processors

Digital
payment
specialists
Tech
giants

Telco

customer relationship
Launch sector solutions or stand-alone lead product for customer
acquisition
Aim to increase and retain volume of payments to generate transaction
revenues and scale
Launch sector solutions through partnerships and seek for value chain
expansion
Aim to capture high revenue use-cases first and expand to higher
volume (in-store) environments
Launch sequential new product delivering merchant value creation to
specific sectors
Aim to collect customer data to enhance advertising and create new
commerce options
Launch new customer experience solutions leveraging partners to
reach scale and credibility
Aim to reduce customer churn and find alternative revenue models
Launch sector solutions or partner with networks to launch bank-like
payment products

Aim to increase in-store traffic, generate new sales opportunities and

Retailers

SOURCE: McKinsey Global Payments Practice

optimize costs (i.e., avoid transaction fees)

Launch innovative shopping solutions leveraging low cost payment
products and customer log-in
6

EMERGENCE OF NEW BUSINESS AND OPERATING MODELS

C Apple Pay announcement is not quite revolutionary, but it is a

significant Payments development on several fronts
Product enhancements
iPhone now comes in two different sizes matching
offerings from Samsung
iWatch has seamless integration with phone and
cloud
Apple Pay leveraged cloud, NFC and thumbprint
security to offer the most secure mobile
payments solution
Payment platform

NFC enabled device

Secure element that bonds the card to the phone
Tokenization (EMVCo spec)
6 tokens resident in phone and tied to partner
networks
Wearable tap and go w/ TouchID on phone and
watch
In-app, one-click payment with iTunes

SOURCE: McKinsey Global Payments Practice

EMERGENCE OF NEW BUSINESS AND OPERATING MODELS

C Online payment has become the norm, feeding an internet finance

ecosystem in China
What payment method do you usually use?
% of CE online shoppers, N=236
3rd-party
payment

76

Online
banking
Cash on
delivery

Internet
finance

19

RMB10 tn

Market share of online

% TX value
Others

3rd

party payment

20
China Unionpay

50 Alipay

11
Tenpay

3rd-party
payment

P2P
lending

RMB9 tn

RMB60 bn

20

EMERGENCE OF NEW BUSINESS AND OPERATING MODELS

C Alibabas financial ecosystem centers around

its ecommerce platform

B2B platform
International
China

June
1999

May
2003
C2C
platform

Aug
2003
3rd party
payment
platform

Data based SME

lending service
with banks
Two banks
"e-Daitong
with CCB
Yirongtong
with ICBC

Micro lending
companies
Zhejiang
(2010)
Chongqing
(2011)

Trade finance
service
Yidatong
(Trade
finance
service)
Outsourced
import/export
service for
SMEs

Guarantee
companies
Shangcheng
Financing
Guarantee
(Chongqing)
Provide
guarantee
service to
SMEs

Unsecured
SME lending
with banks
SME loans
by banks
based on
online
transaction
histories

June
2007

June
2010

Nov
2011

Sep
2012

July
2014

Feb
2008
Alipay
launched
Mobile
payment

Apr
2008

Feb
2013
B2C platform

New
brand in
2012

June
2013

Establish
personal and
business credit
management
Ali Sesame
credit
management
to build
financial credit
services

Jan
2015

May
2015

Online P&C
insurance company

Alipay launched
Money Market
Fund Product
YueBao

Ali Ant group

launched equity
crowdfunding
platform

Products targeting

Cooperate

Provide equity

at Taobao/Tmall
sellers

d with
Tiaohong
Fund first,
later
acquired it

crowdfunding
for startups,
especially in
ecommerce
domains

EMERGENCE OF NEW BUSINESS AND OPERATING MODELS

C Building on success of ecommerce, Alibaba grew first into payment,

then financing and wealth management

Payments

Alibaba
Taobao
Tmall
Financing
ECommerce
platforms

Product

Description

Alipay

Payment service

Credit payment

Credit payment

Microfinance

Microfinancing service to SME

Guarantee

Enhance credit for Alibaba microfinance's securitization

products

Yidatong (Trade
finance service)

Outsourced import and export clearencing service

provider for SMEs

Insurance online shops

~50 insurance companies set up flagship stores in

Wealth
management

Taobao.com
Products include auto insurance, accident and health, etc

Dingcunbao
(Term deposit)

term deposit product on Taobao allowing direct deposit

on the Alipay financial management page

Zhongan.com

Online P&C insurance company, a JV with Tencent,

PingAn, etc.;

Yuebao

A monetary fund

Mutual fund online shops

1st batch of 10+ mutual fund companies will launch in the

trial period
10

EMERGENCE OF NEW BUSINESS AND OPERATING MODELS

C Alipay expediting mobile development and

exploring innovations

Alipay's ongoing innovations in mobile and finance

Alipay
Wallet

QR code/bar code payment: payment info acquired via

bar code reader or mobile app

Voice payment ("Dang Mian Fu")payment info read

through a ultra-sound signal sent by smart phone, available
on some vending machines in Beijing & Shanghai

Super
Payment

Smartphone as POS: APP installed in merchant smart

mobile device or offline POS terminal at earphone port

Facilitate money collection by approved merchants into a

designated Alipay account

11

EMERGENCE OF NEW BUSINESS AND OPERATING MODELS

C AliPay introducing barcode payments through a strong

campaign at convenience stores to penetrate into offline
payment
AliPays merchant offline payments

Merchant scan the consumers Alipay

Offline
Payments

barcode/QR code to direct transfer balance

from consumers alipay account to merchant to
fulfill the payment
Enabled the smartphone based cardless
payment

Promotion campaign 10% off

Get 10% off
for the first spending
10% discount (Max:RMB5) per first
spending everyday above RMB2

Promotion campaign for barcode payment in

Strong
promotion
campaign

Cheaper
for
merchants

convenience stores, covering 15,000 stores

under 20 brands in 21 cities
Cash benefits in convenience stores to drive
user adoption
Get 10% off (Max:RMB5) for the first
spending everyday above RMB2
Get RMB 5 if spending over 5

Barcode-based payment
at cashier

During promotion: free of charge for amounts

under CNY 20,000, 0.6% for above CNY 20,000

After promotion is ~0.6% of transaction value
(compared to 0.78% for POS machine)
12

EMERGENCE OF NEW BUSINESS AND OPERATING MODELS

C Gamified user experience incentivised usage of Alipays P2P

payments and investment products

Account Balance

Yuebao

Daily updated peer &

performance comparison
motivates users to check
balance daily

cumulative
return

7-day
annualized rate

% of users you have beaten (in

Absolute return
in past 7 days

Absolute return
in past 30 days

terms of absolute return) in the

same city

Shanghai
Your return has beaten:

Yesterday return
Cumulative absolute return
7-day annualized rate of return

P2P transfers

Transfer to Alipay Account

Payee account #

Transfer amount

(performance indicator for

monetary market fund)

Absolute return in past 30 days

Absolute return in past 7 days
Withdraw

Voice msg

Lucky
pocket

Wish u May wealth Flying

prosperity
come
pocket

Deposit

P2P Transfers

Users can send messages

(text & voice) and emoticons
along with P2P transfers

Next step

13

EMERGENCE OF NEW BUSINESS AND OPERATING MODELS

C Alipay: Emerging International ambition

Global-> China

China->Global

Global China travelers

Work with Boarderfree to enable

International customers who

Work with international duty

leading retailers and brands (ie Macy's

and Neiman Marcus) in providing
cross boarder shopping for Chinese
consumer
Pay by RMB, no international credit
card needed

buy goods and services from

local Chinese merchants
Clients of Escrow can enjoy
Alipay-like Guarantee
Payment service so as to solve
the trust issue between Chinese
merchants and them

free store, ie Lotte in

providing alipay offline
payment

14

EMERGENCE OF NEW BUSINESS AND OPERATING MODELS

C Tencent building a financial ecosystem around its social

network platform

QQ
Instant
Messenger
Most popular IM
tools in China
Over 200mn
users
Launched value
added product
including
emotion, skin

Paipai.com
C2C Platform

Feb
1999

Sep
2005

QQ users can
open shopping
account
automatically

Ten Pay
3rd party payment
Platform

WeChat
Smart phone
based IM and SNS

Webank
First internet
based bank

Leverage the
existing
customers of QQ
and Paipai.com

Over 600mn
user
Most popular IM
and SNS in
China

Ecosystem
based on
WeChat
Wealth

Lottery

Order Taxi

Specials

Movie
Tickets

Lucky
Money

Group
Buying

Games

WeChat
payment
based on
Ten Pay

Focus on micro
loans business
Targeting at
individual
customers and
small business

Work with
Sichuan
province to
collaborate on
smart city digital
initiatives, as egovernment,
online
healthcare, etc

License in July
2014; launch in
Q4 2014

Jan
2011

Aug
2013

Go Dutch

Smart city
collaboration

Jan
2014

Feb
2014

Incorporate
Taxi App

QR code scan
payment

Used for
order taxi
Complete
Payment
from

May
2015

Scan Q-R code

provided by
merchant to
complete
payment

Feb
2015
WeChat
Hongbao
feature

Collaborate
with CCTV for
new year
hongbao
distribution

15

EMERGENCE OF NEW BUSINESS AND OPERATING MODELS

C With a customer base of 600 million, WeChat launches

payment service in version 5.01
WeChat Payment
Description

Launch
WeChat

600 million
users

Provide
3rd-party
payment
license

Tenpay

#2 3rd party
payment

200 million users

Public
account
Valueadded
services
Wealth
management

Enterprises, celebrities or media run public accounts in WeChat

while users can follow them

WeChat users can purchase Tencents value-added services

like games, emotion packages, with WeChat payment

Collaborating with China AMC, WeChat has launched a

Yuebao-like product named Licaitong

O2O
(Online-tooffline)
ECommerce

Others

Q-R code:
Vending machines (collaborate with Gaopeng and Ubox)
Offline merchants
Taxi service (collaborate with Didi3)
B2C website shopping
Weituangou (group buying)
Movie ticket booking
Other payment services (ie AA
payment, red pocket etc)

1 Launched in Aug 2013

2 As of 2013 Q3, while the largest, Alipay, has a market share of 49%
3 Tencent has strategic investment in Didi taxi
16

EMERGENCE OF NEW BUSINESS AND OPERATING MODELS

C WeChat payment P2P red packet campaign signed up millions of

users overnight during Chinese New Year

Choose a card

Lucky pocket

Lucky pocket

Bank card 1

# of red
envelops

Bank card 2

Total
amount

Add new bank card

Continue

Message

Send

History

More

Step 1: Click Send

Please input password

Pay Now!

Step 2: Create a lucky

pocket

Step 3: Choose a bank

card

Lucky pocket

Lucky pocket

Sent to fd

Cancel

Lucky pocket receivers will

get random amount of
money summing up to the
total amount set by the
sender
From Jan 30 to Feb 8:
~10 million WeChat
users have been
engaged in the Lucky
Pocket APP
Over 40 million red
pockets were
dispatched

Post in
Circle

Pay
Send another

Step 4: Input the

password

Step 5: Click the righttop sharing button

Step 6: Share the lucky

pocket with friends
17

EMERGENCE OF NEW BUSINESS AND OPERATING MODELS

C Tencent is building the O2O ecosystem around payment to increase

user sickness and transaction frequency
Collaborate with Didi

From

Mobile number

Verify

To
Verification #

1 month after
partnership

Tips

Step 1:
Choose Didi taxi

taxi
Cover 32 cities
Over 350K drivers
subsidizes every
transaction to get mass
market

Call a taxi now

Confirm

Step 2: Input your current

location and destination

Step 3: Input your mobile

number and verify

Transaction # paid by

WeChat: 21 mn
Didi taxi users: 40 mn
(~20 mn before the
partnership)

Input the payment amount

Taxi service
Confirm

Pay in cash

Step 4: Enjoy the service

Step 5: Input the amount

and pay using WeChat

Step 6: Successfully
make the payment
18

NEW SYSTEMS AND SOLUTIONS

D Technology driven digital disruption in industries follows common

patterns Payments are at the centre!
Physical
good,
digital store

Physical
goods and
store

Digital goods
and store

Changed
economics

Music

Films

Travel

Software-as-aservice

Software

Banks
Included in
consumer
ecosystem

Point of sale

SOURCE: McKinsey Global Payments Practice

Consumer
reviews
Distribution

Device providers
(iOS, Android)

Friends and
community

19

NEW SYSTEMS AND SOLUTIONS

D Example: Alipay voice payment Dang Mian Fu

(Click to play video)

20