Transformation of the Electronic Payments Industry - Strategies for Growth
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This presentation provides a glimpse into the evolution of the digital payment industry and a discussion of both short-term and long-term strategies that players in this space could potentially adopt to stay ahead of the competition. I've diverse interests across wide-ranging topics and industries and I thoroughly enjoy analyzing information and devising strategies to help companies better position themselves for the challenges ahead. If you require more information and data, feel free to reach out to me at francisfoo@wustl.edu or connect with me on LinkedIn www.linkedin.com/in/francisfoo/. Thank you for your interest! Hope you find the information useful.
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Transformation of the Electronic Payments Industry - Strategies for Growth
- 1. Transformation of the Electronic Payment Industry - Strategies for Growth
- 2. Topics A) Overview B) Evolution D) Short-term strategies C) Change Drivers E) Long-term strategies F) Key Takeaways
- 3. Digital Payments : “ Payments made over an electronic network such as the Internet ”
- 4. Electronic cash e.g. PayPal, Bitcoin Electronic / Mobile Wallets Smart cards Modes of Digital Payment 3 e.g. Google wallets, Amazon.com Credit / Debit Cards 1 2 4
- 5. “The value of global payments via mobile devices will reach around $507 billion in 2014, a rise of nearly 40% year-on-year.” PwC World Payments Report Juniper Research “Rapid growth in contactless card payments is the single biggest trend in payments in some markets at the moment – 278% growth in Europe.” The future of payments & banking is digital. “Mobile payments doubled between 2012 and 2013 to $1 billion. Mobile payments in the U.S. will top $58 billion by 2017, and phones are just the beginning of e-cash.”
- 6. 1887 – First concept of credit cards in Edward Bellamy’s “Looking Backward” novel 1918 – Electric money was born 1950 – IDC (Diners Club International) was created 1958 – American Express emerged 1968 – First networked ATM 1978 – First debit card was issued by The First National Bank of Seattle. First credit card terminal was introduced by Visa. Birth of e-commerce. 1994 – EMV (Europay / MasterCard & Visa) standards were created to foster global interoperability. 1996 – Launch of Google Checkout Evolution of Digital Payment
- 7. 1997 – First contactless payment system – Speedpass was launched by ExxonMobil 2007 – First digital / mobile wallet created by M-PESA 2009 – First digital currency – bitcoin – was born. 2011 – Starbucks accepted mobile payments nationwide in the U.S. Cascading effect on industry with many major retailers adopting mobile payment technology Evolution of Digital Payment (cont’d)
- 8. Key Change Drivers : 1. Technology 2. Consumer / Social Behaviors 3. Legislation & Regulation
- 9. 1 ) Technology Time Gap 1887 First mention of credit card concept - 1918 Electric money was born 31 1950 IDC (Diners Club International) 32 1968 First ATM network 18 1978 First debit card. First credit card terminal introduced by Visa. Birth of e- commerce 10 1985 First online purchase made. Discover Card introduced 7 1994 EMV standards introduced 9 1996 Google checkout launched 2 1997 First contactless payment system launched by ExxonMobil 1 2003 NFC (near field communication) approved as standard 6 2006 Payment card security standards council established 3 2007 1st digital / mobile wallet 1 2009 Bitcoin born 2 2011 Starbucks accepts mobile payments nationwide 2 Technology is disrupting the payment industry Accelerating Industry transformation Other fast-evolving technologies (e.g. Near-Field Communication) will facilitate the move to payment using mobile technologies. The distinction between channels and devices is blurring, with interactions over the internet, mobile across multiple uses converging into a common set of digital services. Cloud computing
- 10. 2010 - Square allows consumers to buy, sell and send money using any Apple or Android mobile device. It is designed to help small businesses accept credit card payments and to help consumers transition to a cashless, cardless lifestyle. >> 1 ) Technology 2013 - LoopPay allowed me to make contactless payments at virtually every retail point-of-sale terminal >>
- 11. 2012 - Barclays’ “Pingit” mobile payments service launched Enables customers to send money using just a mobile number 1 ) Technology
- 12. Greater willingness to adopt new technology – shift from telegraphs to credit cards to mobile wallets Online generation Demand for seamless, instant connectivity Social networks will flourish and dominate + Opportunity Information availability Target customers + Opportunity Consumers’ spending increases when they pay with mobile technology (sometimes even twice as much) Business growth Implications : 2) Changing consumer / social behavior
- 13. Durbin Amendment, U.S. 2010 - The bill drastically lowers swipe fees – the fee charged to merchants every time a customer pays with plastic Consumer Credit Act, UK Regulation on card profitability is making non-card payment propositions more attractive Removes market friction Instills consumer confidence in new digital systems 1974 - Legislation comes into force, giving extra protection to people using their credit cards to buy goods costing between £30 and £10,000 (the limits changed to £100 and £30,000 in 2005). 3) Legislation & Regulation US National Science Foundation 1991 - Lifts restriction prohibiting commercial enterprise on the Internet – cleared the way for e-commerce to thrive
- 14. Agents of change will continue to revolutionize the digital payment industry. Credit cards have gone from being one of the most profitable areas of lending to one of the least – changing fortunes Proliferation of smart gadgets, including wearable technology Adaptation of the chip and PIN technology “Money 3.0” Era – voice recognition, fingerprints, retinas, DNA Near-field communication (“NFC”) could see further innovation
- 16. Changing consumer / social behavior Legislation & Regulation Be the first-to-market – roll out mass market offerings that are robust yet simple. Once consumers make their first mobile payments, they are much more likely to convert to regular usage. Utilize the power of data analytics to segment and target customers Enhance partnership with retailers and review the interchange fee revenue model to include additional value- adds Focus on transparency and security in marketing / customer communication to pre-empt regulatory issues Reinforce market positioning Short-Term Strategy (1-3 Years) Driving Force Strategy
- 17. Technology Driving Force Strategy Leverage third party technology and form alliances with strategic technology partners to provide a seamless multi-platform experience e.g. healthcare, lifestyle companies (e.g. Uber or GrabTaxi), e- commerce (e.g. Amazon) Short-Term Strategy (1-3 Years) Build on existing installed user base to introduce new offerings and diversify revenue streams e.g. advertisement on app
- 19. Hard or impossible to predict the future Learn from history and from successful companies that were able to transform themselves Long-Term Strategy (>3 Years) Recommended Strategies 1. Organizational Culture “Move fast” – A strategy is as good as its execution. Change from being a perfectionist to a risk-taking/ entrepreneurial culture. Set up nimble teams that focus on innovation. First-mover advantage might prove critical 2. Anticipate consumer concerns and needs Turn concerns into opportunities Mounting concerns on cyber security and privacy Banks enjoy natural advantage as trusted institutions Provide products that give customers assurance of mind; give them control over the sharing of personal details
- 20. Long-Term Strategy (>3 Years) Recommended Strategies 3. Technology Invest in world-class technological infrastructure Reinforce data and analytics capabilities to enable the bank to offer targeted, differentiated offerings to retain and attract customers 4. Partnerships & Acquisitions Build long-term partnerships across industries Focus on initiatives that could better connect bank customers with retailers (working with retailers, both brick-and-mortar and online) to explore ways to enhance overall customer experience Consider acquisition of target companies that could accelerate bank growth and enhance attractiveness of product offerings
- 21. Digital revolution will change the digital payments industry Technology, changing consumer behavior and regulatory actions will accelerate transformation Short-term – Reinforce and move fast Long-term – Anticipate, adapt and invest Key Takeaways
- 22. For more information, contact francisfoo@wustl.edu
Editor's Notes
- Digital revolution is upon us and this has been said to death. What’s really important for us in the financial services industry and more specifically, at Citi, is really the magnitude of change. World Payments Report – Capgemini + RBS Bank Magnitude – threats to existing players as well as the opportunities for people who are able to get it right
- Before looking at the key driving forces behind the change, it’s critical that we have a good understanding of how digital payments have evolved through the years. This is a nutshell / snapshot view of how digital payments have evolved over the years. 1918 – when the Fed first moved currency via telegraph (31 years later) 1994 – Banks saw the benefits of chip-based payment and realized that international standards for such payments were needed to help foster global interoperability. 1996 - Google Checkout was launched – online payment processing service for simplifying the process of online purchase payments
- Before looking at the key driving forces behind the change, it’s important that we have a good understanding of how digital payments have evolved through the years. This is a nutshell / snapshot view of how digital payments have evolved through the years. 1918 – when the Fed first moved currency via telegraph (63 years later) 1994 – Banks saw the benefits of chip-based payment and realized that international standards for such payments were needed to help foster global interoperability. 1996 - Google Checkout was launched – online payment processing service for simplifying the process of online purchase payments 2011 - ….with many major retailers adopting mobile payment technology money transfer and microfinancing service for Safaricom and Vodacom, the largest mobile network operators in Kenya and Tanzania.
- Now that we have a good appreciation of how the digital payments industry has evolved, we can now dive in and look at the factors driving those changes through the years. Interestingly, those factors that drove the changes through the years are also likely to the ones that will continue to affect the transformation of the industry going forward. I have identified three key factors, or change drivers, responsible for the driving the changes in the industry. They are 1. technology 2. changing consumer / social behaviors 3. legislation & regulation.
- – Internet opened the doors to a new world of innovation and technology is disrupting the payment industry like it has to many traditional industries such as retail. Going back to the evolution timeline that we have seen earlier, we notice that the numbers of years it took for one new change to occur has shrunk dramatically through the years. Cloud computing provides impetus for new innovation NFC chips inside most mobile phones can transmit banking and payment data when placed near readers typically with a smartphone or tablet as the point of convergence and control
- When I was doing my research on this topic, I came across some interesting technology that could potentially change the way we transact going forward. End-to-end purchase integration - Payments are becoming an integral part of digital commerce, where pre and post purchase activities such as search, comparison, selection, payment, and rewards operate seamlessly together- for example in digital wallets such as Google Wallet.
- The next generation of customers would have grown up online, fully connected through social networks. This continuous and uninterrupted conversation will probably lead to greater demand for payments to be instantaneous or “real-time and 24/7”. Interconnected lifestyle – in the past, things tend to move and operate independently. One-stop shop concept. Social networks will be important in many future payment systems, and ones that have trust technology built in will likely flourish.
- The adverse impact of regulation on card profitability is making non-card payment propositions more attractive. Weirdly aided by the govt Doing great things to help interchange fees go down, to help money move more quickly, to help business pay less and help consumers save money.
- Money 1.0 - Telegraph Money 2.0 – Credit cards, smart cards We found contrasting views as to how the mobile payments landscape will evolve, and in particular, whether NFC [Near Field Communication] or cloud-based wallets will ultimately dominate,” Pay securely on a mobile device without needing to know account details.
- Now that we have a good understanding of how the electronic payment industry has evolved through the years as well as the driving forces behind those changes, let’s take a look at what we could potentially do in the short-term.
- Strengthen partnership with retailers and organizations – Banks are not the only ones affected by the digitization of the economy Look beyond card-based revenue models Banks will become interested in offering apps that go beyond just simply checking your balance, paying your credit card, and remote check deposit. They will try to build all-in-one multi-device payments and finance platforms similar to the mobile wallets described above. Why is this important? Because banks are not immune from disruption and disintermediation. Already, software-based startups like Simple are creating interfaces that basically act as a new layer between banks and their customers. Offer pure vanilla products Encourage mass adoption among Citi users
- Strengthen partnership with retailers and organizations – Banks are not the only ones affected by the digitization of the economy Look beyond card-based revenue models Banks will become interested in offering apps that go beyond just simply checking your balance, paying your credit card, and remote check deposit. They will try to build all-in-one multi-device payments and finance platforms similar to the mobile wallets described above. Why is this important? Because banks are not immune from disruption and disintermediation. Already, software-based startups like Simple are creating interfaces that basically act as a new layer between banks and their customers.
- How do you position yourself for the future when you don’t know what the future holds? Paradigm shift in thinking Historical bank-centric or even customer-centric business model of payments, toward a buyer- driven interaction model. Accept that the current industry is undergoing disruption at an accelerated pace. Be comfortable with new ideas cannibalizing current business revenue – e.g. introducing Evolve our thinking on network access and partnership, other competing networks will be more attractive. A mindset change. Old – bank-centric / customer-centric business model of payment to be changed to one that embraces the entire payment ecosystem and come up with value propositions that cater to the needs of diverse parties – retailers, events, consumers, banks, organization