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McKinsey on Payments
Foreword 1
Matt Higginson To put these trends in perspective, this article lives—communications, planning, shopping,
Steve Krieger presents 16 predictions and observations dis- health, transportation—making “in-app” the
tilled from recent conversations with execu- new battleground for both online and in-
Wings Zhang tives in the payments arena around the globe. store shopping. The persistent strengths of
Each topic will help shape the payments arena cash—convenience (cash is versatile and
and should figure in the strategic thinking of widely accepted), control (cash is final and
banks, card companies, processors and tech- spend is limited to cash in wallet) and value
nology providers as they determine the best (it’s free, at least in appearance)—vanish in a
path and the right partners. Depending on digitizing world:
size, client base and market position, their
• Convenience: Stored preferences and ac-
strategy will aim to defend core business,
count information enable both the au-
mount a charge of creative destruction, or
tomation and personalization of
strike a balance between the two.
payments, which can be initiated anytime,
1. As shopping moves in-app, anywhere, with virtually no geographic
digital payments displace cash boundaries.
Multichannel shopping puts the consumer • Control: Smart tools to control expendi-
front and center, and creates new sources of tures, increase savings and improve budg-
value for merchants. Mobile devices have be- eting afford much broader control and
come the “digital container” of our daily stronger financial management than cash.
18 McKinsey on Payments October 2015
• Value: Repetitive interaction enables mer- grams in order to determine the best deal by
chants (usually in cooperation with their weighing card offers (e.g., extended war-
payments and data analytics partners) to ranties, special financing), store coupons
extend offers and services tailored to a and loyalty points, among others. While
consumer’s location and needs. users value a unified, ubiquitous experience,
data ownership and privacy have become
As consumers increasingly use their major strategic considerations for con-
sumers and merchants alike, as illustrated
phones, tablets and computers to by Apple Pay’s insistence on not collecting
shop anytime, anywhere, merchants payments data (see “Digital wallets: Mind-
ing the consumer adoption curve” page 26).
need to keep track of individual
3. Migration to EMV ignites mobile
consumers across channels to ensure
payments
a consistent consumer experience. The migration to EMV standards across mul-
tiple regions outside Europe requires most
2. Multichannel solutions win as parties to invest in chip technology. While is-
channels converge suers and acquirers bear the largest part of
As consumers increasingly use their phones, migration costs (converting all cards and ac-
tablets and computers to shop anytime, any- ceptance technology from magnetic strip to
where, merchants need to keep track of indi- EMV chip), merchants who fail to install chip
vidual consumers across channels—online, readers assume huge financial risks in the
mobile, proximity—to ensure a consistent form of liability for fraudulent transactions.
consumer experience. In order to stay in touch Some merchants are still oblivious to the
with the consumer at each step of the search- new standards; however, many others are
evaluate-buy-bond cycle, most merchants will using the conversion as an opportunity to
forge partnerships and alliances with data an- implement mobile payments solutions, in-
alytics specialists and digital innovators. cluding wallets, mobile payments terminals
To keep up with merchant requirements, (e.g., Square, iZettle) and QR-payment ap-
payments companies must, therefore, be plications (e.g., Zapper, LevelUp). As a re-
prepared to deliver integrated, multichannel sult, mobile payments solutions will see
exponential growth in specific regions and
solutions that combine, for example, pre-
verticals, such as gas stations, events and
authorization, split payments and customer
ticketing, and health and beauty.
analytics across channels. This will require
expanded capabilities (see #5) and strategic 4. Nonbanks will continue to lead in
partnerships (see #15 and #16). peer-to-peer
Digital wallets have a key role to play in Peer-to-peer (P2P) payments remain a
multichannel convergence, and in order to stronghold for cash in most markets, as
stand out from the competition, some wal- many incumbent banks, being risk-adverse
lets will incorporate multiple loyalty pro- or unprepared to cannibalize traditional
16 in 2016: Trailblazing trends in global payments 19
sources of income, have yet to make an air- with legacy systems and a chronic deficit of
tight business case for P2P solutions. By top digital talent, must adapt to a new era of
contrast, digital innovators, including Pay- cloud-based data warehousing, application
Pal, Alipay, TransferWise and Venmo, have program interfaces (APIs), faster solutions
realized benefits from P2P payments far be- development and launch, and periodic relia-
yond authorization, clearing and settlement bility-testing (e.g., hackathons) to reap the
and threaten to displace traditional banks potential of big data in three areas:
from this important category of payments.
• Dynamic business steering, adjusting ag-
The main sources of value in P2P include:
gressiveness in specific customer seg-
• Cross-sell opportunities with related serv- ments at specific moments of time (e.g.,
ices (e.g., through booking, ordering, risk appetite, pricing, payments condi-
shopping, gifting, donating) tions)
• Marketing insights derived from pay- • Insights- and behavior-driven marketing,
ments and browser data (e.g., used for including micro-campaigning, cross-sell-
event-based offers, promotions and mar-
ing, retention
keting)
• Data-rich consumer and enterprise appli-
• High margins among small and medium-
cations, simplifying onboarding and serv-
sized merchants with consumer-like be-
icing, reducing fraud and risk, and
haviors
enabling spend comparisons
• Attractive currency exchange margins on
cross-border remittances 6. Loyalty enters a new age
Digital loyalty programs have become cru-
Knowing how to extract cial for merchants to understand the needs
and behaviors of their customers and to
value from data is the
maintain market share. As a result, mer-
core competitive requirement in chants are increasingly turning to payments
companies to integrate loyalty features with
multichannel commerce.
payments services, either as turnkey solu-
tions or by supplementing merchants’ pro-
5. Bigger, smarter data requires
prietary solutions. Depending on the
bigger, smarter capabilities
markets they serve, payments service
Knowing how to extract value from data is
providers should support one or more of the
the core competitive requirement in multi-
four main types of loyalty programs:
channel commerce. Data-rich solutions use
powerful technology to capture and process • Segment-oriented programs, enabling
data across channels and along each step of micro-segmentation with tailored offers
the value chain in order to provide real-time and service levels (e.g., Amazon Mom,
insights into the needs and preferences of re- myWaitrose) or segment-specific plat-
tail consumers, SMEs or large corporations. forms with tailored campaigning features
Traditional payments companies, burdened (e.g., LevelUp, Belly)
20 McKinsey on Payments October 2015
other service providers to broaden the offer- P2P and C2B mobile payments, and Earth-
ing by using APIs to integrate their services port in cross-border corporate payments.
with cloud-based applications.
10. Cyber attacks will increase
9. Domestic infrastructures move to Wary of increased costs and reputational
real-time damage caused by cyber attacks, merchants’
Over 22 markets across the world are up- and payments companies’ investments in
grading national payments infrastructures, cybersecurity are at an all-time high. Tok-
improving speed, cost and security for mer- enization, where card details are replaced
chants and consumers. In Europe, real-time by a substitute number (or “token”), is
direct-to-account payments solutions are poised to become the strongest deterrent to
becoming the norm, with Denmark, Swe- digital card fraud and a vital complement
den and the UK in the lead. Current discus- to end-to-end encryption/point-to-point
sions among regulatory bodies aim for a encryption.
pan-European real-time payments infra-
While competition among various tokeniza-
structure. Domestic payments system oper-
tion service providers in North America has
ators in Canada and the U.S. have recently
produced diverse standards, the rest of the
begun to overhaul their systems as well.
world remains at a nascent stage. Tokeniza-
(See “Transforming national payments sys-
tion comes in two forms:
Exhibit 1
Customer... Description Typical pricing model Examples
Digital companies
1 Fee to buy and own the product or service Fee per transaction iTunes
offer three main Pricing typically driven by the value of the product “Enriched” fee per Amazon
pricing options Owns
the solution
or service transaction
Product becomes the customer’s asset
ing pricing models that will build more sta- works. It also has the potential to replace ex-
ble revenue (Exhibit 1). isting proprietary ledgers, enhancing trans-
parency, improving the predictability of
12. Blockchain promises innovation settlement and reducing operating expenses
in corporate banking business significantly in securities trading and similar
models over-the-counter situations. If distributed
Bitcoin’s blockchain technology, in which ledgers become the basis for the booking
each transaction generates a “block” con- and transfer of public securities, they will
taining an authenticated history of all prior bring about significant changes in post-
transactions in the network, bonds partici- trade activities such as clearing, custody and
pants in a marketplace without intermedi- cash management.
aries. As the basis for distributed ledgers,
blockchain technology is expected to be a 13. Digital banks prove the shift in
key driver of disruptive innovation across the trust paradigm, starting with
the financial services industry. While the im- daily banking
pact of Bitcoin on the payments landscape
Digital-native banks, such as Atom Bank
has so far been negligible, leading financial
(the first to receive a full banking license in
institutions (including Citibank, UBS,
the UK) challenge the deeply rooted as-
Deutsche Bank and Standard Chartered) are
sumption that physical branches are neces-
starting to explore the capabilities of distrib-
sary to generate trust. There is little
uted and collaborative architectures to in-
question, however, that in time consumers
crease speed and flexibility and reduce costs.
and corporate decision-makers will prefer
The blockchain promises to streamline cum- the enhanced convenience, control and value
bersome, costly and risky correspondent net- of digital banking to bricks and mortar.
16 in 2016: Trailblazing trends in global payments 23
Exhibit 2
Digital attacker banks Process/business model Non-banking technology Platform attackers
disruptors attackers
Four attacker
archetypes, pursuing ING Direct Stripe Starbucks Apple
different strategic Hello Bank! Pingit Tesco Google
Simple MobilePay Uber Alibaba
objectives
Disrupt rather than be Address unmet customer Expand along the value Create the ecosystem
disrupted needs chain
Protect and grow core New use cases and revenue Deeper share of wallet with “Logged-in ecosystem”
business models current customers around core offering
(eCommerce, technology,
Value proposition for new Enhanced customer Expansion along the value hardware, software)
customer segments experience chain, providing end-to-end
offering
Lower cost-to-serve through Lower cost-to-serve through
new channels increased efficiency
Source: McKinsey
Digital banking apps have already become a Stripe, Danske Bank’s MobilePay) focus on
standard offering across the globe, function- building market share through more com-
ing in some cases as a “control tower” for pelling customer experiences, and “non-
customer relationships. Ross McEwan, CEO banking technology attackers” leverage
of RBS, has noted, “Our busiest branch in payments as a way to deepen their share of
2014 is the 7:01 [train] from Reading to wallet with customers of their core offering
Paddington.” and provide an end-to-end offering. Posing a
particularly broad threat to incumbents,
While established providers gradually ex-
“platform attackers” (e.g., Apple, Google)
pand the functionality of their banking apps
create logged-in ecosystems (often compris-
(from view-only information to internal
ing operating system, hardware, customer
transfers, bill pay, external transfers, etc.), a
relationships and servicing), thereby obtain-
new generation of digital-native banks is
ing an extremely rich view of customer be-
bringing improved standards of cost-effi-
havior and motivations (Exhibit 2).
ciency to the industry.
Regardless of the type of innovator, pay-
14. Digital challengers extend their ments remain the strategic enabler of new
claim to “own the customer” commerce offerings and changed economics.
eBay PayPal
Source: McKinsey
OpenTable provides an instructive example to build skills and scale rapidly, despite the
of broad capabilities acquired over time known challenges of integrating cultures
through a combination of acquisitions and and systems.
partnerships (e.g., Yelp or Facebook). The
Global investments in fintech ventures
result is a best-practice example of end-to-
reached an all-time high of $12 billion in
end integration, which enables OpenTable to
2014, and the high valuation multiples of
accompany consumers through their search
recent transactions, including Global Pay-
and comparison of restaurants, from table
booking and transportation, to payment at ments, Micros, Clear2Pay or ICBPI, signal
the table and loyalty. intensifying competition among investors to
acquire payments innovators. The coming
16. The next M&A wave has started months will almost certainly see this wave
While a number of large incumbents have of fintech acquisitions gain momentum.
successfully launched next-generation pay-
***
ments solutions, most banks are still seek-
ing an expedited path to develop and To win in the new payments arena, banks
launch innovative digital solutions. With and other service providers must strike the
nearly 5,000 fintech companies focused on right balance between defensive moves and
payments, making it the most active cate- creative destruction. This requires deep
gory in the fintech space (Exhibit 4), acqui- thinking and analysis along four strategic
sition is at present a highly attractive way dimensions:
16 in 2016: Trailblazing trends in global payments 25
8%
1
350+ commercially most well-known
cases registered in the database, might
not be fully representative. Customer
2 4% 5%
Includes small and medium enterprises. Segments
3
Including large corporates, public entities 3%
and non-bank financial institutions. Retail
4
Includes investment banking, sales and 1%
2%
trading, securities services, retail Mid-corporates 2 2%
investment, mutual funds and asset
management factory.
Large corporates 3
Source: McKinsey Panorama Fintech Database