CH&Co. eYeka Misys digital money white paper May 2015

1. TO PAY OR NOT TO PAY, THAT’S A DIGITAL QUESTION WHITEPAPER 2015

2. THE MARCH OF HUMANITY INTO THE INFORMATION / ELECTRONIC AGE IS IRREVERSIBLE 02

3. 03030303 CONTENTS Executive Summary 04 The Opening Scene 06 Arguments and 07 Counterarguments How Did We Get Here? 08 Phase 5 is “the big shift” 10 Mode of Transaction: The Convenience 10 of Contactless Payments Supporting Technology 11 Operator: The Less I Feel I Pay, 14 The Better I Feel Substance: Money that Bypasses 18 Banks and Governments Let’s Talk Regulation 22 Consumer Expectations: Dreaming 23 about the Future of Money? So What Did We Learn? 26 Developing a Strategy: 27 How to Stay Relevant Fundamentals and Priorities 32 Conclusion 33 Appendix/References 34

4. EXECUTIVE SUMMARY We’ve clearly made the irreversible move into the digital age. It has already transformed the way we shop, work and play, which has led to rapidly changing consumer expectations, thus upsetting all game plans. And banks, whose basic form and function as facilitators of payments has up to now been relatively unscathed by new technologies, are not immune. It’s early days, but mounting evidence indicates a growing number of consumers no longer assume banks are essential to purchasing transactions. It’s time for expansive thinking on the part of senior managers to define and implement creative strategies to ensure banks remain relevant in the payments ecosystem in coming decades. Take nothing for granted. Our management consulting team at Chappuis Halder & Co (CH&Co) has teamed up with banking software provider Misys and crowdsourcing platform eYeka to bring you a glimpse of what lies ahead for payment service providers. The days of visiting a bank in person may be over and it’s likely that cash and cards will disappear entirely as alternative forms of purchasing power emerge alongside digital money. At the same time, competitors outside the banking industry, mainly telecommunication and technology firms, are making steady inroads into the payments arena. There is no time to lose. Customer attention is shifting away from banks and revenue will be quick to follow. Our goal is to translate our findings from this study into practical strategies that banks can adopt or adapt to secure market share in the digital age. How Did We Get Here? For the sake of simplicity, five fundamental dimensions can be considered when defining a simple payment transaction: type of transaction, mode of transaction, supporting technology, operator / issuer and substance. All have evolved in distinct phases over time, but what caught our attention at CH&Co and spurred this study is that for the first time, four dimensions are simultaneously undergoing very rapid change, transforming the very nature of payments and money. • Mode of transaction: Consumers now expect to conduct transactions electronically through unwired electronic devices, regardless of location and proximity to a physical bank. • Supporting Technology: The pace of technology — with the rapid rise of smartphones and data-transmission capabilities supported by cloud computing, near field communication, wearable technology and biometric authentication — is surpassing banks’ established modes of transaction. • Operator/Issuer: Market newcomers are using their knowledge of consumer behaviour and technological strength to enrich the customer’s purchasing journey by: 1. reducing friction in the relationship between customers and payment service providers; 2. increasing the inclusion of customers by reaching out to a wider audience and reducing costs; 3. engaging customers by offering a strong user experience and benefits; and 4. establishing trust by signing up validated new clients. • Substance: New players are slowly establishing a system that doesn’t rely on legal tender regulated by banks and governments to provide customers with purchasing power. We refer to new forms of money, such as cryptocurrencies and loyalty points, as digital money. Banks should act quickly to redress their traditional approach to fundamentals in the payment ecosystem. New players are better able to streamline payments, predict consumer wants and needs, and capitalise on the potential of digital money, threatening to push large financial institutions outside the daily transactions perimeter. 0404

5. Dreaming about the Future of Money To better understand what a digital-savvy audience thinks about the form and function of money, CH&Co and Misys joined forces with crowdsourcing platform eYeka to launch an online contest in late 2014 and asked participants: “IF YOU HAD THE ABILITY TO DECIDE, HOW WOULD YOU WANT TO USE EVERYDAY MONEY IN THE FUTURE?” Creativity was encouraged and the answers (grouped into themes below) reflect this. However, the often unorthodox views should not be dismissed. Rather they should serve as a warning to banks that they also need to be thinking creatively about the future of money — because their customers already are. • Ease is king: An easy, frictionless payment process is necessary, even if it’s at the expense of consumer privacy. • Death of physical money: Money needs to keep up with the times. Its function will only increase but its form is not a constant. • New and evolving currencies: Currency should evolve to fit society’s needs and allow consumers to make the most of every exchange. • Role of banks: The financial services industry is ripe for disruption by various technological entrants, to the extent that banks may find they are no longer seen as vital to the financial ecosystem. • Trading privacy for convenience: Technology companies are pushing the boundaries of what’s possible and are seen as trusted managers of financial services. • Empowered customers: Consumers are aware of their influence and power and wish to be acknowledged and appreciated. We learned that consumers are eager to move forward. Not only have they digested recent technological advancements in the digital age, but they want more — a lot more. From a single global currency to an ethical perspective inserted into the essence of money itself, the fundamentals are relevance and zero friction. What Can Banks Do to Stay Relevant? As non-banks continue to expand their offerings in payment services, slices of the pie can still be claimed by financial institutions if they build a clear ‘digital money’ strategy. All five dimensions of money discussed earlier — type of transaction, mode of transaction, supporting technology, operator/issuer and substance — have to be considered to ensure a successful digital transformation. Ways that managers can develop a digital-capable bank include: 1. Leverage internal assets, enable partners: Strengthen back-end infrastructure and seek partners with a proven ability to focus on the client experience. 2. Build new engines for emerging ecosystems: Start fresh. Make investments in building, rather than in transforming, new payment-processing platforms. 3. Stand proud, claim back the client relationship: Provide more value-added services to customers through smarter insights into what they want, which could require bringing in experts. 4. Build new marketplaces, act as facilitators: Develop fresh teams that can break with the past (disturbing the status quo and potentially upsetting egos). Fundamentals and Priorities When it comes to day-to-day payments, we believe banks have to make a choice between acting as processing entities and developing their own ecosystem. Staying in the middle won’t be sustainable. The rise of new entrants who not only possess a mindset that mimics that of the end user (the customer) but who also play the card of technology faster and smarter, are a real threat to traditional financial institutions in the payment space. In this context, digital should not be seen as a chapter in the company strategy. It is actually the environment in which any meaningful plans have to be developed as it changes both value propositions and interaction models within the complete ecosystem (i.e. customers, partners and staff). More importantly, no matter which strategies it deploys, a bank needs strong convictions that will serve as a compass during turbulent times. Long story short, winners in the payment space will be those who take risks and go bold. 05

6. Changes in customer behaviour and technology are continually testing traditional financial institutions. The financial services industry is already taking steps to keep up in the digital age, but the biggest change yet is still to come. Consumers no longer want but expect to have fast, easy and secure access to banking services as an integrated step in their customer journey. Trying to impress clients with a blackboard menu of customer experience, social connectivity and on-the-go banking is pointless. In fact a compelling digital offering is now seen as a hygiene factor (referring to Herzberg’s motivation theory). But here’s the warning: As banks continue to cope (painfully) with these fundamentals they need to be aware of the fundamental change in the payments market to come. Day-to-day payments have dramatically evolved over the past decade to a point where the use of coins or banknotes has become increasingly niche. In parallel, the substance itself, currency, is challenged by alternatives where operators and issuers of money are no longer restricted to traditional players. New entities offer true substitutes to currency and plastic and can now bypass existing settlement architectures. The fact is, ownership of money is moving away from banks and government. Entrants from the telecommunications and technology sectors are absorbing the essence of banking, money issuance and management. The traditional definition of money where its management lies in the hands of a few is becoming outdated. To sharpen that picture even further, imagine a world where money is generated, spent and settled without going through banks — a world with no cash. Looking at banks today it’s difficult to see their purpose in this future. Our conclusions might strike some as farfetched, but recent history reminds us that ‘black swan’ events (referring to Nassim Nicholas Taleb theory) are not so rare and can be instruments of serious disruption. This joint study, performed in collaboration with banking software provider Misys and crowdsourcing platform eYeka, evaluates this change from a historical perspective. We will outline the main underlying trends that support our convictions. We also offer insights into how customers say they want to use money in the future, which includes alternative mediums of exchange. The goal is to translate our findings into strategies that banks can adopt or adapt to secure market share in the digital age. While this paradigm is new, we believe its impact will have a profound impact on established players in the financial services industry. It is time for bold moves. THE OPENING SCENE 06

7. ? ? ? The evolution of financial services is a vast subject so we’ve set some realistic parameters for this white paper and focus solely on payments and its ability to support transactions. We have considered the issue on a global scale. While wealthier countries have developed infrastructure for financial services to meet banking needs compared with other countries where a large numbers of the population are still ‘unbanked’, the ongoing changes in the provision of financial services will have a significant impact globally. From a customer-segment perspective, this study mainly looks at retail clients but we believe that most of the findings can be extrapolated to the industry as a whole. The philosophy of this study is forward-looking: What will happen to the bank-customer relationship in the coming decade and will banks remain relevant in the future financial landscape? There is no one exact answer for this, only predictions, however we have tried to ensure that our prediction is an informed one. Our methodology is as follows: - Examining industry trends (historical, actual and future) with a list of selected references in the appendix. Our objective is not to overwhelm the reader with data gathered from existing studies but to use the information as a starting point for reflection. - Using knowledge of financial services that CH&Co, Misys and eYeka acquired in the areas of digital banking and digital money, based on projects managed worldwide. - Assessing technology, whether it exists today or will soon emerge, without input by Misys experts who are conducting research and development and delivering banking solutions across the world. - Crowdsourcing creative ideas generated in collaboration with eYeka to better understand what the term money will mean to customers in the future and how the changing concept of money and its value will affect the way we live and consume. - Interviewing industry experts to refine and confirm our conclusions, including top managers in banking as well as technology companies, mobile carriers and retailers. Rather than predicting a definitive future, we aim to trigger discussions surrounding our assumptions and conclusions. If this study brings about new considerations in the meaning of money and the future role of banks — whether it’s in agreement or disagreement — we shall consider the paper a success. Our paper will expose the pressing need for banks to further explore the digital frontier, which will become the basis of the provision of financial services in the coming years, and examine what strategies will allow banks to thrive if customers are to continue to perceive them as the definitive structure when it comes to money management. Readers might consider the content and conclusions of our study controversial; however we believe a transformation is taking place within the financial community, which motivated us to conduct this study and share our convictions. ARGUMENTS AND COUNTERARGUMENTS 07

8. H0W DID WE GET HERE? The payment landscape has radically changed since people first began conducting business. While entire books are dedicated to the historical analysis of finance, for our purposes we suggest the simplified version below. Defining a simple transaction, five fundamental dimensions are considered: We see time (the time it takes to conduct the transaction) as a consequence of the five dimensions above. Depending on the stage of maturity (e.g. from using gold to using bitcoins), payments that used to require days or months to be processed can now be transacted in almost real time. These dimensions have evolved over time and combined, characterising the financial environment in which transactions take place. Phase 1: The simplest form of payment — bartering goods and services — is established. Phase 2: Specific commodities representing the value of goods (e.g. precious metals) are introduced. The widely used medium is now the norm enhancing ‘market liquidity’. Phase 3: Governments and banks begin to issue regular coins, banknotes and documents such as cheques. This confirms the power of states and regulation is introduced. Business becomes even more fluid and safe. Phase 4: Limitations of physical money are solved and electronic currencies are vouched for by institutions. The globalisation of people, goods and transactions gets under way, fostered by the age of the Internet. Phase 5: Today convenience is a prerequisite for any product or service offered on the market, including money. Financial institutions and digital players can provide advanced solutions via new platforms, such as money-management apps and payment services. Cheques and cash are disappearing. Not only are payments and the user experience changing, but also the very nature of money. Dimension of a transaction Description Examples Type of transaction • The logic of executing a transaction • Barter • Payment (including ledger) Mode of transaction • The method used to execute a transaction • Material exchange (hand to hand) • Electronic exchange Supporting technology • The tool that has been developed to facilitate the execution of a transaction • Currency • Debit/credit cards and card readers • eWallet (e.g. PayPal) • mWallet (e.g. M-Pesa) Operator/issuer • The entity that facilitates the execution of a transaction • Banks • Governments Substance • The representation of money that is used to execute a transaction • Goods and commodities • Coins and banknotes • Electronic forms of currency • New digital money (e.g. Bitcoins) Figure 1: Dimensions of a transaction

9. The combination of these two perspectives, namely the fundamental process of transactions and the distinct phases in the evolution of transactions, explain the depth of change by highlighting its origins. Figure 2: Changes taking place across each of the dimensions of money The evolution of the fundamentals are linked : for example the rise of new technologies might trigger a change in the available mode of transaction, or a change in the substance could enable new players to enter the market. But at this stage, understanding the order isn’t relevant to our study. Rather we are tackling the larger question of why the time is ripe for the biggest change yet in the financial services sector (Phase 5). Our answer is this: For the first time, out of the five dimensions of money, four dimensions are transforming simultaneously and the change is profound. Let’s review these in more detail. Dimensions of money Phase 1 Phase 2 Phase 3 Phase 4 Phase 5 Type of transaction Barter Payment is made possible Payment Payment Payment Mode of transaction Material exchange Material exchange Material exchange Distance become irrelevant with wire transfers Electronic and contactless payments minimise the need for heavy infrastructure Supporting technology N/A N/A Printing (or minting) reduce dependency on precious commodities Computers and the Internet end physical constraints eWallet and mWallets gain large market share thanks to mobile phones and NFC/HCE Operator / issuer Individuals Individuals Banks and governments are the main operators Banks and governments New operators emerge such as telecommunications and technology firms Substance Goods Precious commodities Coins and banknotes Electronic representations of coins and banknotes Digital money 09

10. O1 2009 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 2,200 2,400 2,600 2,800 O2 2009 O1 2010 O2 2010 O3 2010 O4 2010 O1 2011 O2 2011 O3 2011 O4 2011 O1 2012 O2 2012 O3 2012 O4 2012 O1 2013 O2 2013 O3 2013 O4 2013 O1 2014 O2 2014 O3 2014 PHASE 5 IS “THE BIG SHIFT” We have already witnessed a deep transformation in the retail financial services environment, but we believe it has yet to reach its peak, as explained in the following sections. We will focus on the most recent phase (Phase 5) to better understand the underlying trends and their impact on money. We will look at the question : “What is happening to money?” in the context of the four changing fundamentals: 1. Mode of transaction 2. Supporting technology 3. Operator/issuer 4. Substance MODE OF TRANSACTION: THE CONVENIENCE OF CONTACTLESS PAYMENTS The method for the execution of transactions has evolved dramatically over the past decade. Previously consumers had to physically exchange goods or artefacts, with all the related limitations. Wire transfer through computers or credit card terminals then became available but payments remained constrained by unwieldy underlying infrastructure. Today, consumers have grown accustomed to conducting transactions electronically through unwired electronic devices. What used to be constrained by location and proximity has become available anytime, anywhere. By the end of 2017, an estimated two billion people will make their purchases through their smartphones or tablets, up from 1.6 billion at the end of 2014. At the start of 2015, mobile and tablets account for 32% of visits and 22% of transactions on websites and the average order value through mobiles is at par with the desktop channels2. The sharp increase in the use of smartphones for payments can be explained by: • More mobile phones. There are nearly seven billion mobile subscriptions worldwide as of May 2014. This is equivalent to 95.5% of the world population. • More smartphones. More than a quarter of the global population will use smartphones in 2015 3 • More bandwidth. Given the shift towards higher speed networks (the number of 2G subscribers dropped from 90% of total subscribers in 2008 to 67% in 2013, signifying the portion of 2G subscribers moving to 3G/4G networks), more consumers are now able to tap into the advanced data functionalities of their smartphones.4 10 Global Mobile Data Growth Average monthly mobile data per user 900MB 2 Economic Times Retail, Feb 2015.Extracted from http://articles.economictimes.indiatimes.com/2015-02-01/news/58675771_1_tablets-swan-life- style-company-jabong 3 Marketer Intelligence, Dec 2014. http://www.emarketer.com/Article/2-Billion-Consumers-Worldwide-Smartphones-by-2016/1011694 4 Juniper Research, 2014. Extracted from http://www.cnet.com/news/mobile-transaction-users-to-jump-to-2-billion-by-2017/ on 07/02/2015 at 1812hrs

11. 31% CENTRAL AMERICA 57% SOUTH AMERICA 34% MIDDLE EAST 85% WEST EUROPE 53% EAST EUROPE 21% CENTRAL EUROPE 53% EAST ASIA 8% SOUTH ASIA 48% S.EAST ASIA 16% AFRICA 84% OCEANIA38% GLOBAL AVERAGE: 85% NORTH AMERICA CLOUD COMPUTING MOBILE DEVICES WEARABLES BIOMETRICS Active 3G/4G Connections, Compared to Total Active Mobile Connections (2014, Q4) Source: “We are Social”, GSMA Intelligence Report, Q4 2014 • More time on mobile phones. The proportion of media time spent on mobile phones rose from 13% in 2012 to 17% in 2013, representing an increase of 10 hours and 15 minutes a month.5 The playing field for companies offering digital services — so that a customer can use a smartphone or tablet to transmit payment information — is already very competitive and will only become more so as the use of smartphones continues to rise. SUPPORTING TECHNOLOGY Money transactions have long been aided by technology, making payments easier, faster and more convenient over time. Now, however, the pace of technology is surpassing banks’ established modes of transaction. With the rapid rise of smartphone computing and data-transmission capabilities — supported by cloud computing, Host Card Emulation, Near Field Communication (NFC), wearable technology, biometric authentication and distributed protocols/open ledger — consumers want their mobile devices to be the means by which they achieve an even more efficient and timely payment journey. Cloud Computing The development of cloud computing has effected game-changing advancements in data transmission and storage. The centralised storage of data coupled with increasing data transmission rates (3G to 4G) makes current smartphones/mobile devices essential tools for transactions and payments. Digital wallets rely on cloud storage of credit card information for security and it is the easy and fast access of this information that is the basis of digital payments. Dependency on unwieldy and costly infrastructure owned by large institutions has dropped, lowering the entry barrier to unprecedented levels. The rise of Fintech (start-ups developing new solutions to address financial services) illustrates the ability to create in couple of months a payment intermediary that is there to succeed, or fail, fast. Figure 3: Technology layers

12. “TECHNOLOGY IS THE ANSWER TO USERS’ EXPECTATIONS” Tamas Braun, Director of Global Sales and Business Development (Digital Channels), Misys 12

13. 2013 200 400 600 800 1,000 1,200 1,400 2014 2015 2016 2017 2018 Near Field Communication With cloud technology underpinning the evolution of the payments system, smartphones use NFC technology for improved user experience with transactions. NFC allows smartphones and other electronic devices to establish radio communication with each other by touching them together or being in close proximity. NFC-capable devices provide: 1) secure transactions — this happens through data encryption 2) ease of use — no need to carry multiple cards 3) versatility — seamless transfer of data By adding NFC technology to their smartphones and other electronic devices, Apple was able to create an internal payment system that improves the customer experience within its retail realm. Google created a free digital wallet app called Google Wallet that can be used to make store purchases with a NFC-enabled device. Beyond the ability to push customer experience to new levels, NFC is a means by which to bypass current networks owned by financial Institutions. Device-to-device payments are now available, making the use of cash or cards unnecessary. Wearable technology Smartphones are hardly the end of the road. Going forward, mobile devices are likely to play a much larger role in the life of their owner, as demonstrated by the rising popularity of miniature electronic components that can be worn by consumers. Wearable gadgets that track information related to health have already penetrated the medical-device and fitness markets, with 33 million units shipped globally in 2014. The wearables market is projected to grow at a compound annual rate of 35% over five years, reaching 148 million units shipped annually by 2019.* Given that wearables can provide real-time information on transactions, locations and customers, we think it will only be a matter of time before these gadgets provide finance-related services. Source : businessinsider.sg – The wearable computing market report 2014 13 World Shipments of NFC-enabled Cellular Handsets (in Millions of Handsets Shipped) Source: IHS Inc., Feb 2014 http://www.nfcworld.com/2014/02/12/327790/two-three-phones-come-nfc-2018/ HCE enhanced by NFC, a central innovation in payments. Near Field Communications has made ‘contactless’ payment a reality. By allowing short-range, two-way communication between devices and using a mobile phone’s SIM card for identification and authentication, NFC makes it possible for consumers to securely transfer money from one device to another. Host Card Emulation is a cloud-based security platform that allows the easy adoption of contactless payments by consumers and vendors. With HCE, customers can transact with merchants regardless of the type of mobile carrier service they use. Instead of needing to ‘rent’ hardware space on each carrier’s SIM card, HCE allows NFC applications to be hosted in the cloud, making it easier for companies to implement contactless payment solutions.

14. BANKING PRODUCTS AND SERVICES Client touch point PRODUCT / SERVICE AS A SUPPORT Client touch point Client touch point Client touch point Biometric Authentication With respect to cloud and device-to-device data transmission, consumers consider security and ease of use of paramount importance. Biometrics, which uses recognition software that measures human features such as fingerprints, face, retina and hand geometry and odour /scent, will be the future of authentication, allowing hassle-free, data-rich transfers for seamless payment transactions. Today, increased security means increased inconvenience, with manual, multi-factor authentication. Tomorrow, you’ll be able to instantly confirm you are who you say you are. OPERATOR: THE LESS I FEEL I PAY, THE BETTER I FEEL Banks and credit card companies have long dominated the payments market, but the environment is rapidly changing and traditional players are facing increasingly stiff competition. Yesterday’s payment providers merely provided processing services as an additional and isolated event to support the actual transaction. Today’s market newcomers promise to enrich the customer’s purchasing journey, hiding the basic process of payment within a satisfactory overall experience. Consumers want intuitive payment systems that not only offer choices in methods and recipient but that also help them to select the most appropriate alternative via which they can generate benefits such as discounts or vouchers. Banks remain entrenched in traditional payment-processing methods and are thus lagging behind dynamic new entrants — upcoming players that pride themselves on innovative approaches to the user experience when making a payment. The new leaders focus on: I. Reducing friction in the relationship between customers and payment service providers. In common with Uber — a mobile app-based transport network developed in the U.S. that revolutionised the way people travel by creating a dependable carpooling system — new operators focus on providing an entirely different service where payments are no longer at the heart of the experience but are reduced to a simple email summarising the service and related fees. Il. Increasing the inclusion of customers by reaching out to a wider audience and reducing costs. Largely used by people in cities to send money to family and relatives living in rural areas, mobile wallet transactions have tripled over the past two years on the back of cost effectiveness and ease of access. Ill. Engaging customers by offering a strong user experience and benefits. For example, Apple’s digital wallet service Apple Pay provides a mutually beneficial system. In its closed ecosystem, merchants offer customers convenience as well as better deals (such as discounts and loyalty points), which in turn encourages customers to stick with the service to make payments. lV. Establishing trust by signing up validated new clients. U.S. lodging-service company Airbnb gives peace of mind with its stringent validation procedures of clients who want to rent out their properties as well as customers who are looking for a place to stay. Travellers are more at ease using Airbnb, which has translated into increased service uptake. Non-Banks as Payment Providers Unlike retail banks, which are highly regulated and conventionally focused on financial products and services, non-banks are firms whose core business does not typically handle payments or other global money transactions. As an example, telecommunications firms such as Bharti Airtel and Vodafone, retailers such as the Future Group, and large groups like Reliance Industries are looking to tap a market of 937 million mobile subscribers in India. Realising this potential for revenue growth, non-banks are quickly shifting their focus to take advantage of their knowledge of consumer behaviour and technological strengths. Adding payment transactions to their core business is an organic extension, providing an enriched customer experience. While the ability to generate direct revenues from payments is inversely correlated to the level of competition and regulation, players see the chance to make profits by using customer data to cross-sell and in targeted marketing. The approach taken by non-banks falls outside the normal banking perspective. Banks are going from products towards client experience GAFA are going from client experience to product/services Figure 4: Two groups of players with different approaches to business We can see the payments landscape becoming highly competitive with new entrants crowding the field. Non-bank service providers benefit from the increased use of mobile in this space, with the number of mobile-payment transactions expected to grow about 60% a year.

15. 2010 MOBILE PAYMENT TRANSACTIONS (b) CAGR 2010 - 14F 92.3% 55.4% 0 5 10 15 20 25 30 35 2010 2010 2010 2010 Banks Non-Banks The surge in volume of non-bank mobile transactions shows that customers are already looking beyond the traditional payment providers. And the mere fact that non-bank competitors are gaining traction against established financial institutions exposes the widening gap in their ability to provide a seamless and convenient payment experience, with new entrants better able to meet market demand. This is illustrated in the U.S. where a group of retailers have developed their own digital payment system (see box below). Will CurrentC Take Over from Credit-Card Processors? The Merchant Customer Exchange (MCX) was created by a consortium of about 70 U.S. retail companies (including Wal-Mart, 7-Eleven and Best Buy) to develop a merchant-owned mobile-payment system. Called CurrentC, the system is expected to be launched this year. The stakes are high: combined, the partners own more than 110,000 stores nationwide and process more than $1 trillion in payments annually. CurrentC is a mobile wallet app that allows customers to use their phone to make purchases within the closed group of retailers and automatically save money from coupons and special offers, and earn rewards from loyalty programmes, while offering them a simpler and safer way to pay. Unlike Apple Pay, which uses NFC technology, CurrentC customers punch a security code into their phone to launch the app, and then use QR codes — a machine-readable code consisting of black and white squares — to complete a purchase with their device. Payment options include chequing accounts, store gift cards and select store debit and credit cards registered with the digital wallet. The merchants are not only able to make sales transactions more convenient for their customers but they will also be able to take credit card companies out of the equation, eliminating the 2-3% transaction fee charged by credit card companies for each purchase. For now, the world’s tech giants — Google, Apple, Facebook and Amazon (GAFA) — and other major non-bank players are still dependent on banks and credit card companies to process and clear payments for their products and services. But they have given us a glimpse of a world where traditional payment providers are no longer essential to the value chain of commerce. As we wait to see if MCX (see dedicated box) is successful as a standalone payment ecosystem, it’s clear the day of a global cashless society will come. It’s already happening in Africa : Mobile-money service M-Pesa has proven very successful in meeting the needs of the unbanked population. Eighty percent of adults in Africa do not use traditional financial services but almost everyone has a phone. In 2007, Kenya’s largest mobile-network provider Safaricom and Vodafone launched an initiative that allows Kenyans to use their mobile phones to set up an account to send and withdraw money and make payments. Today it is used by more than 17 million people in Kenya and has expanded to Afghanistan, India and Eastern Europe, giving millions of people an alternative to a physical bank. Given the extent and pace of changes taking place in e-commerce, banks could be pushed aside, forcing their position in the financial ecosystem to evolve. And as the role of banks evolves so too will the payment industry as a whole, with the emergence of open platforms and Application Programme Interfaces (APIs) that can provide mix-and-match services to customers. The ability of new entrants simply to leverage existing payment processing capabilities could turn banks and credit card companies, such as Visa and MasterCard, into basic utilities. 15

16. Likely Winners in the New Digital Payments Landscape We classify the landscape of operators according to their primary/core activity: • Banks and credit card companies, such as MasterCard and Visa (from a customer perspective) • Telecommunications firms/mobile carriers, such as T-Mobile in the U.S and M-Pesa in Kenya • Technology-driven multinationals, such as Apple and Google • Retailers, such as Starbucks and Amazon It is interesting to see how these different players stack up in their ability to become convenient and widely acceptable payment-service providers. With each player adding specific value, it’s difficult to say who the big winners will be but it will be a clear departure from the current bank-dominated environment. Advantages Challenges Banks • Historical entities owning the market • Established payments-processing infrastructure • Large customer base that is likely to stick with the status quo rather than change payment habits • Recognised as secure and regulated • Lack of understanding of customer behaviour • Provide payment services in isolation from the overall experience • Remain largely dependent on physical cards (credit/debit cards) • Lack of convenience due to security layers • Need to make payment disappear behind the true client goal (e.g. acquiring a product) Telecoms • Wireless networks 3G and 4G provide large bandwidth and data transmission capability • Mobile phones are ubiquitous with high penetration rate among unbanked populations (emerging economies) as well as entrenched distribution networks • Enhanced visibility during payment transactions • Not allowed to maintain deposits • Consumer trust mostly based on brand name and confidence in product/service • Unlikely to see financial services as a revenue driver so may pass on expanding niche business • Rely on traditional telecommunication network for connecting people Tech companies • Own the device, such as NFC-capable smartphones, that enables mobile payments • Able to tap into large pool of customers and merchants • Wide knowledge of customers that goes beyond payment behaviours • Enhanced visibility during payment transactions as real-time information is captured and provided to customers • Mainly the intermediary between customers and merchants • Face stiff competition as illustrated by the market erosion due to new players such as Apple Pay and Google Wallet Retailers • Own the end objective of the customer (i.e. the targeted product) • Can take advantage of cross-selling opportunities to offer customers better deals • Need to partner up for volume to achieve substantial revenue from mobile payments • Do not own the individual customer experience as much as tech players (e.g. Apple Pay) 16 Figure 5: Advantages and Challenges of competitors

17. Apple Pay Goes from Strength to Strength In September 2014, Apple rolled out a mobile payment and digital wallet called Apple Pay, which allows certain Apple mobile devices to make contactless payments at retail and online checkouts (Equipped with NFC technology the Apple devices can communicate wirelessly with point-of-sale systems). More than one million credit cards were registered on Apple Pay in the first three days of availability. It has since become the largest contactless payments service in the U.S., outpacing other digital providers (including Google Wallet) that have been on the market for years. Points of Comparison Apple Pay Why Security High Encompasses multi-factor authentication including a security Touch ID (a fingerprint identity sensor) and tokenisation (replacing the actual credit card number with a special number to make payments). Acceptance Medium Apple is a neutral non-bank that is globally recognised and trusted by its huge base of users, including 800 million customers who put their credit cards on file with the company. At launch, Apple had more than 220,000 in-store/in-app partners and strong ties with top U.S. banks including Citibank, Wells Fargo and Bank of America. Value-add (novelty and cost) High No cost/fee for users. Apple reportedly takes a 0.15% cut from each Apple Pay transaction, which is marginal compared with the 1.7% per transaction cut absorbed by banks managing card transactions. Enhancement (synergy for convenience and ease of use) High Focuses on customer experience, which is enhanced through an integration of existing platforms that enable payments: iTunes, Passbook, iCloud, iSight, iBeacon and TouchID. 17 Figure 6: Apple Pay analysis

18. Characteristics Description Examples Free from physical constraints (portable) • No physical representation of value is necessary. No specific device needed to effect transaction • Virtual wallets • No need of coins/banknotes Free from geographical constraints • Transactions enabled across geographies • Minimal restrictions on convertibility, if any • Transboarder transactions • Loyalty points Free from accessibility constraints • No necessary travel /physical effort • No necessary ‘warm body’ intermediary • Transactions enabled from multiple devices/touch points • Front end managed by the consumer • No need to go a bank branch • Self-service • Cryptocurrencies Free from delays • Allows real-time transactions (unless constrained by the number of intermediaries and the current infrastructure) • Fast transfer of money from one bank account to another SUBSTANCE: MONEY THAT BYPASSES BANKS AND GOVERNMENTS Although money has existed in electronic form for some time, it has remained backed by the physical existence of currencies issued by banks and governments. Closely correlated with the rise of new operators, innovative forms of money have surfaced over the past decade. Today the emergence of cryptocurrencies and the increasing acceptance that loyalty points can be used as online payment for goods and services are the first indications of the next industry shift: Banks and governments might still be at the forefront of issuing and managing money but other players are materialising who are able to command sufficient trust from buyers and sellers and have put forward compelling alternate value propositions. They are slowly establishing a system that does not rely on legal tender regulated by banks and governments to provide customers with purchasing power. We use the term ‘digital money’ to describe new forms of money such as cryptocurrencies and loyalty points. Digital money exhibits the following characteristics: • It is free from physical constraints. • It is free from geographical constraints. • It is free from accessibility constraints. • It is free from delays. The table below provides a brief description of the characteristics of digital money and examples of each. 18 Figure 7: Characteristics of digital money

19. $1,000 $750 $500 $250 $0 Week from Monday, Nov 26, 2000 UTC CoinDesk BPL: $979.45 www.coindesk.com 2011 2012 2013 2014 2015 1h 12h 1d 1w 1m 3m 1y All Jul 18, 2010 Feb 04, 2015to Cryptocurrencies Essential to the discussion of the current digital money landscape is the emergence of cryptocurrencies. Since the creation of Bitcoin in 2009 and its relative uptake, numerous cryptocurrencies have surfaced for trade in online markets. Today, there are more than 1,200 cryptocurrencies with a market capitalisation of nearly US$3.6 billion. Although the price of cryptocurrencies is still relatively volatile, over the past four years they have increased in value, pointing towards a widespread and growing demand for such forms of money. Cryptocurrencies allow people to send and receive money without using banks as intermediaries. Their inherent qualities are appealing: • Users can send and receive money instantly. • Fees are reduced for processing transactions. • They ensure greater privacy and anonymity. • They empower the customer, who no longer has to rely on government or banks. In order for any form of money to become successful (i.e. become widely used as a medium of exchange for the buying and selling of goods and services), not only must consumers be willing to use it, there also needs to be merchants who are willing to accept it as a form of payment. By that measure, Bitcoin is a success. Some of the biggest merchants in the U.S., including Target, Subway and Victoria’s Secret, accept bitcoins. Major payments-service provider PayPal has partnered with Bitcoin processors BitPay, Coinbase and GoCoin to allow its merchants to accept the cryptocurrency for digital goods such as online games and song downloads. We still do not know how regulation of Bitcoin or cryptocurrencies will be put in place or whether that will affect their unique value compared with central bank-regulated currencies. But putting aside the question of whether regulation is required for any form of money to be successful, it’s important to note that a significant number of governments have become interested in the digital marketplace. A few have even acknowledged cryptocurrencies as a form of money, including the U.S. Treasury Department, which in March 2013 recognised Bitcoin as a “decentralized convertible virtual currency”. Regulatory acceptance would only lend more weight to the legitimacy of cryptocurrencies. As cryptocurrencies gain momentum and become an increasingly accepted form of payment, we think governments will look to administer the issuance and pool of cryptocurrencies, so that trade and consumption using these currencies doesn’t upset the management of traditional currencies (in terms of inflation for example). It took PayPal, which was founded in Palo Alto, California, in 1998, less than a decade to become a key player in the payments industry. PayPal succeeded where other dot-coms failed because it was able to solve a problem that merchants were experiencing: Small businesses were flocking online to sell goods (e.g. eBay) but the banks couldn’t give them a way to accept electronic payment. The typical acquiring industry (i.e. credit cards providers) was not able to support small business — not from a business Figure 8: Bitcoin Price Index

20. point of view but rather from a technological perspective. PayPal provided the solution because it enabled any individual to start an online business and accept e-payments. Boosted by e-commerce, PayPal grew to become the industry giant we know today. Up to this point PayPal was ‘just’ another channel for banks as customers linked their bank or their credit card details to their PayPal account. PayPal added a layer to manage security and risk and improve the user experience, similar to what Apple Pay is doing with mobile payments. In this model, banks are still part of the payments process, providing the underlying infrastructure while using PayPal (or Apple Pay) as an additional channel to address the market and therefore increase the use of their services. We believe PayPal’s key impact on the banking industry is not with payment itself, as banks are still required in the processing chain, but the transfer of money. With the borderless world of the Internet, PayPal has created a completely separate clearing system that allows customers to send and receive digital money from one PayPal account to another — irrespective of location — by mobile phone or email. This is done instantly whereas a money-transfer agent such as Western Union can take several days to send money from Washington, D.C. to Singapore, for example. As a result, banks and other traditional payment providers have seen their combined remittance market share drop to less than 10% in the U.S. We expect more day-to-day transactions to be cryptocurrency-based as the benefits are more widely recognised. While still new, the potential impact on banks is significant, including potentially lower revenues, a lower average account balance and a drop in deposits. Bitcoin versus traditional currencies. Bitcoin is a virtual currency (and a cryptocurrency) but not a digital currency because it is not regulated according to the European Central Bank definition. And it is not a real currency according the U.S. Department of Treasury because it lacks the key attributes of legal tender (for reasons outlined below). However, Bitcoin shares other attributes of a currency: it’s scarce, divisible, portable, durable and recognisable. Bitcoin can’t currently replace traditional currency because: 1. It is not a dependable medium of exchange. There are about eight million bitcoins compared with about US$2961 billion in circulation. To substitute the cryptocurrency for dollars would give each bitcoin a value of US$370,125. In addition, the maximum number of bitcoins is 21 million (due to its fundamental construction logic), which would not be sufficient to drive economies. 2. It does not provide a unit of market value. Because of volatile fluctuations in Bitcoin value, it cannot be used to value assets and debts. As the supply of bitcoins is fixed, its value can rise or fall dramatically compared with traditional currencies, where issuance is controlled to maintain value. 3. It lacks security. Bitcoins have no physical representation and they could easily be expunged in the digital world. To its advantage, Bitcoin allows anonymity during transactions and its management can be handled by whoever is involved in the payment process, ensuring democratisation of money and transparent money flow (open ledger). The success of Bitcoin will depend on its evolution into a secure medium of exchange with a stable market value. 20

21. DRUG 5.2 80 90 78 135 129 162 177 137 191 254 277 325 239 422429 422429 287 153 174 106 133 93 114 74 98 LOYALTY MEMBERSHIPS BY INDUSTRY SECTOR MILLIONS OF MEMBERS CAGR PERCENT DEPARTMENT STORE 6.1 GAMING 14.3 GROCERY 6.6 HOTEL 8.2 HOME APPAREL HARDLINES 20.3 AIRLINE 6.4 FINANCIAL SERVICES 15.7 2006 2008 2010 LOYALTY AND REWARDS POINTS Loyalty programmes were intended as a means for companies to build brand loyalty and retain customers through rewards. This retail strategy can be traced back to 1793 when a U.S. merchant gave out copper tokens that could be collected by customers and exchanged for items in the store. Frequent flyer miles were introduced in May 1981 when American Airlines began the first mileage-based loyalty scheme, Advantage. Since then, retailers across industries and geographies have launched loyalty memberships that award points to customers. While loyalty points aren’t a new concept, they have never been as closely associated with money as they are today. Loyalty points previously represented a low-value proposition for consumers. Members were limited to redeeming goods and services sold by the same merchant, resulting in relatively poor redemption rates. Even worse — from the consumer’s perspective — loyalty points usually came with an expiry date. As a result it wasn’t uncommon for a member to be either unable to accumulate enough loyalty points to redeem the good or service of choice or to have the time to redeem the points and enjoy the programme’s benefits. Over time, however, loyalty and rewards programmes have become more expansive and have the potential to become a new form of money by providing purchasing power to customers. Cross-Company Redemptions It is now possible for members of a particular merchant’s loyalty programme to redeem the goods and services of another merchant. Airlines and hotels have teamed up to reward each other’s loyalty programme members, such as the joint programme between Delta Air Lines and Starwood Hotels and Resorts that allows select (i.e. top tier) loyalty members to receive such additional benefits as priority boarding or late check-out. Loyalty Points Exchange Platforms It’s now also possible for the loyalty points of a particular merchant’s programme to be swapped for those of another. For example, loyalty points gained at a supermarket can now be exchanged to be redeemed at a café (see the following box). Loyalty Points as a Form of Payment Beyond enabling customers to select rewards, new market entrants are looking to encompass loyalty points into their payment options. Shift, a Californian start-up, is developing a debit card that will help consumers pay for regular goods and services using fiat currencies, digital currencies, mobile minutes and loyalty miles, among others. Loyalty and rewards points can also be monetised: The Apple Pay system allows consumers to use air miles or hotel loyalty points in exchange for goods and services from other merchants in the Apple Pay ecosystem. It potentially opens up a range of ways in which people can exchange one form of payment for another. Points.com is a Toronto-based trading platform that offers members access to a range of loyalty programmes, from frequent flyer miles to hotel points to retail and credit card rewards. Subscribers can source, earn and spend the points of more than 50 merchants just like traditional currencies. Through the site’s ‘loyalty wallet’ members can: - track their mile or point balance - exchange points between loyalty programmes - trade with other Points.com users - redeem points - top up to buy extra miles/points with cash Although the value of digital money transactions remains a fraction of total transactions globally, the trend towards digital is growing and an increasing number of players are entering the space in an attempt to streamline payments and capitalise on the market’s potential. In our view, this threat is largely underestimated by financial institutions, which could find themselves pushed outside the daily transactions perimeter.

22. LET’S TALK REGULATION The shift of payments into the digital realm gives customers added simplicity and mobility, but there is a pressing need to develop compliance and regulations for new non-bank entrants in the payments arena to extend the protections that customers take for granted with traditional financial institutions. Today, the rules are not the same for all the players. Banking regulations have tightened considerably since the 2008 financial crisis through existing compliance frameworks such as Know Your Customer (the process of a business verifying the identity of its clients) and Anti Money Laundering (controls to detect and report money laundering). These due diligence exercises were developed with traditional financial institutions in mind however, and are not designed to keep up with the entry of non-bank companies (such as telcos and tech firms) into the financial services sector. On one hand, digital players still navigate with a lighter compliance burden, allowing them full adoption of new technologies (thanks to less stringent selection criteria) and a faster and cheaper time to market. As a result, the difference in the cost of doing business creates a bias in the market towards non-banks. Faster and cheaper might be seen as an advantage from a customer perspective, but it would mean discounting financial security. On the other hand, unclear applicable regulation coupled with extensive and costly authorisation procedures (building the first cases) forces new entrants to adopt a do it first approach, leaving regulators to react. This not only creates confusion on the market among professionals but also among customers, impeding the mid-term stability of the ecosystem. In this context, the debate around restructuring regulations for financial service providers is just starting. Considering the total market value, in our view existing regulations will be adapted and better aligned to non-bank entrants sooner rather than later. Illustrating this trend, the British government has made clear its intention to apply anti-money laundering regulation to digital currency exchanges. The new regulation would support innovation and aim to prevent criminal use of digital currencies. With an additional £10 million allocated in the 2015 budget, the government said it would work to develop a set of standards to protect consumers. We see three major factors in a stable framework of regulations for new operators: 1. The rules. A modular (layered and customisable) approach is required by relevant governing bodies to oversee payments services and digital monies that have a similar mission to central banks with regulated currencies. 2. The players. All non-bank companies providing any sort of financial service should be required to implement and follow standard compliance rules. Today, compliance for financial services is largely restricted to banks and insurance companies. However, with the increasing number of non-finance operators moving into the payments business, the systems in place must be extended to ensure new operators meet legal obligations. 3. The payments ecosystem. Payment providers who host small and medium-size firms or larger merchants will have to make sure their clients also comply with relevant rules and regulations. There is still a long way to go before market practice and applicable regulation reaches maturity. Until then, the current regulations neither afford banks the opportunity to be nimble in the digital marketplace nor shield them from competitors who are. As much as customers recognise the importance of security and protection, they enjoy the enhanced experience provided by non-bank players and will probably only react when a breach has occurred. 22

23. Russian Federation /// 4 France /// 4 Philippines /// 4 Singapore /// 3 United States of America /// 3 China /// 2 Norway /// 1 Argentina /// 1 Kazakhstan /// 1 Australia /// 1 Brazil /// 1 Italy /// 1 Ukraine /// 5 Indonesia /// 8 CONSUMER EXPECTATIONS: DREAMING ABOUT THE FUTURE OF MONEY? Banks have hardly been standing still in the digital age. Today our banks provide us with a multitude of options that make money management tactile, real-time and effortless. But as we have already established, other symbiotic platforms are quickly emerging that empower the consumer to explore an alternative to conventional money transactions. To understand what the money might mean to tomorrow’s consumers, we took a creative journey. CHCo and Misys joined forces with a leading crowdsourcing platform eYeka to set up an online contest in late 2014 to better understand what consumers thought money should be like and what it should allow them to do in the future. Creativity was encouraged. Some of the key themes are not new; however we think the unconstrained convergence of customers’ views crystallises these trends. The Brief: Money is essential in our life. We want it to be easily accessible. With Apple Pay and Google Wallet, Bitcoin and social currency, digital technology provides quicker and better access to money than ever before. But our relationship with money is also affected by other solutions. Air miles are now playing a significant role in the way we pay for travel, and are becoming a new form of currency. Social sharing models are disrupting and improving traditional structures (Airbnb, Uber, etc.). The world is changing and only the user-friendly and innovative models will last. The brief is meant to inspire a global Creative Labs approach to the future of money. They want to hear from you and therefore your opinion matters. What is your current experience and what do you think you will want to use tomorrow? From transactions and payments (PayPal), to loaning, saving, trading and investing (e.g. a social investment platform), we want to know which options you want to survive in the future and what you want in your life. We also want your thoughts on which new technologies should be implemented, whether currently existing or completely original. You decide which device, platform and currency you want. This brief is all about your wishful thinking — so we want you to put yourself in the shoes of a finance superpower. If you had the ability to decide, how would you want to use everyday money in the future and what would you do? Be creative and whacky and send us your vision. So let’s get started. Time is money! 49 Participants from 24 countries Figure 9: Participation to the eYeka survey

24. THEME 1: EASE IS KING An easy, frictionless payment process is necessary, even if it’s at the expense of consumer privacy (a willingness to share personal data with merchants). Respondents shared concepts they believed would allow greater ease in handling money, including; • a solar-powered USB bracelet that includes account information such as credit card details, frequent flyer miles and promotion codes • a digital glove that allows payment with a handshake • a chip inserted in the finger that allowed the consumer to tap and pay These concepts highlight the importance that consumers attach to effective use of technology to make payments/ handling money easier in the future. They assume money and related transactions will be digital and don’t consider privacy a major issue, believing continued advancements in technology will ensure secure transactions. As such, the respondents indicated they would be willing to allow companies to access to their data — therefore allowing a frictionless journey — in exchange for better service or coupons and discounts. “I believe everything that comes ahead will have to be able to simplify people’s lives... Nowadays we’re living a fast life, where spending time on unnecessary things is not an option” - Divina, Philippines THEME 2: DEATH OF PHYSICAL MONEY Money needs to keep up with the times. Its function will only increase but its form is not a constant and the physical nature of money might very well be moving towards extinction. “In the future cash and plastic cards will no longer be in use. In the future to make a purchase you will need absolutely nothing.” - Equant, Russia While the function of money will remain essential to commerce, most respondents agree the three Cs — cash, currency and cards — will disappear. Why carry cash if it can be lost or stolen? Why possess a currency that becomes worthless due to a fluctuation in value? Why have cards that can be stolen or used in unauthorised transactions? Consumers of tomorrow expect the purchasing process will be devoid of such issues. THEME 3: NEW EVOLVING CURRENCIES Currency should evolve to fit society’s needs and allow consumers to make the most of every exchange. In tandem with respondents’ view of a shift away from physical money, they also strongly promoted the idea of a single global currency that is universally convenient to consumers, regardless of the country they reside in, and which is monitored by a global institute such as the World Bank. However, they also envisage a future where entirely new currencies will be formed. These currencies could be based on social behaviour or be backed by the barter of goods and services: • An eco-friendly, behaviour-dependent currency. One respondent postulated flower points, a currency where people accrue money (money equals ‘flowers’) by participating in environmental or ecological activities. “Flowers to encourage green behaviour. ‘Flowers’ is a green worldwide currency that can be used to buy ecological products.” - Limonade, France • Skills as a currency, where skills are exchanged for other skill sets Many of the ideas were literally out of this world (see box below), and implausible in context of today’s established monetary systems. That said, future financial leaders will need to think expansively as the next generations of consumers will no longer be constrained by physical money and will expect the function of money to be multi-faceted. Case Study from eYeka: “Stars and Stripes” By Anduze, France It was a Friday morning in December 2028. I woke up and received the news. People around my bed are telling me that I’m allowed to leave this place where I’m staying. I’m in a clean room with a bed, some lamps, a nice painting and a huge screen, like a window. There I can see the sky, but also watch movies and games. A few days ago they told me that I was hospitalised for a long time and that they had taken care of me during the long period that I was unconscious. Apparently until this week I had been in a coma for 14 years. They were unable to tell me exactly what had happened before I ended up here. Most of the staff are new and could only explain that I survived head injuries. Nobody could tell me what caused this. They took off all the wires on my body, wished me good luck and shook hands. One of them, a tall guy, stayed with me in the room. He sat down in a chair and said he wanted to give me a message. I have no idea why, but he tried to inform me about drastic changes in the outdoor world. There would be cars without drivers, he said, air corridors for drones, outdoor screens to guide people and much, much more. With a smile on my face, I listened but I had difficulty believing him and imagining how big the impact might be. He also said that via an institution called the ‘Milky Way’, everyone received virtual stars. The number could differ from place to place and among countries, based on the economic circumstances and the need. A certain amount of stars would become stripes. So there were stars and stripes and you were able to collect these stars and stripes in different ways. The stars could be used for purchasing goods or services or travelling. In return, it was possible to earn stars by studying, caring for the environment, for rating movies, programmes, services and so on, an almost endless list of possibilities. For example if my host paid for my drinks, he would have earned stars for helping me and that means he would not have to spend anything! In a secure and simple way, communication devices would take care of registering for activities, earning and spending. These would be based on personal needs and on one’s profile. Being inventive, innovative, active and helpful could help you earn more stars and stripes for a relaxed life. Even with a basic amount of stars, one would be able to have housing, food and also an education. This exercise led to some interesting perspectives that we grouped into six major themes.

25. THEME 4: ROLE OF BANKS IN THE FUTURE The financial services industry is ripe for disruption by various technological entrants, to the extent that banks may find they are no longer vital to the financial ecosystem. Many participants in the eYeka exercise believe the role of banks will become more peripheral and limited, shifting their current dominant position in the value chain. Here’s a sample of views along this line of thinking: • Once a biometrics-powered payment process aided by chip technology, is in place, the role of banks will be constricted to analysing trends in payment transactions. • Banks will no longer be at the centre of the payment ecosystem, but rather one player in a crowded field and of limited relevance. • With an influx of new digital currencies, the economics of money and its availability will not be managed by either banks or governments but rather by a multinational such as Google or Apple. From a more general perspective the relationship with money goes beyond payments and participants in the contest highlighted: • Help consumers save/spend effortlessly based on the detection of consumer behaviours • Act as advisors or experts in the management of money, investment advice and budgeting - Prevent clients from spending too much, especially as the purchase process is made easier and easier - Provide information on financial products “Have the bank tailor a product for me. It will no longer be a fixed financial product offered by the bank and I can either take it or leave it. Instead it represent a true collaboration so we can both grow financially.” - Maja, Serbia THEME 5: TRADING PRIVACY FOR CONVENIENCE Technology companies are pushing the boundaries of what’s possible — deepening their involvement in our daily life in the process — and are seen as a trusted manager of financial services. The idea of an experience-centric ecosystem of payment transactions will only gain traction as related technologies continue to advance. While banks still believe that confidentiality is a value cherished by their clients, consumers appear increasingly willing to trade privacy for ease of use. Apple Pay and Google Wallet are successful examples of customers trusting their credit card details to the companies’ servers in exchange for a powerful payment experience. In that sense, Google, Apple and other technology giants are influencing consumer behaviour. Customers are willingly placing increasing trust in these players to help manage their finances, leading them away from banks. THEME 6: EMPOWERED CUSTOMERS Consumers around the world are aware of their influence and power. They wish to be acknowledged and appreciated. This is propelled by a guiding philosophy of ‘What’s in it for me?’ • If nature and the environment win – I need to win • If the banks win – I need to win • If brands win – I need to win • If I am loyal – I need to win This attitude fits perfectly with the Generation Y mindset, which is more focused on personal gain and benefit. Several eYeka respondents indicated they should be recognised and compensated no matter what the activity or transaction. One posited that gamers should be paid by the gaming companies as playing games and forming online gaming communities help the companies gain traction and earn advertising revenue. Another respondent envisaged getting paid for being eco-friendly and recycling. Others focused on social currency — earning more when saving more and customised shopping experiences — forming the outline of a financial ecosystem where different currencies based on enhanced customer experience evolve. By Anduze, France

26. 26 SO WHAT DID WE LEARN? Banks’ services have been critical to world economic development throughout history and consumers still regard them as the most secure means of managing their finances. Safety processes that are governed by strong regulatory functions and a robust bureaucratic approach have positioned banks as the primary institutions for services such as compliance, licensing and risk mitigation. Coupled with long-standing information systems and stable back-end procedures, banks’ relative stability in operations has shown this trust is not misplaced. However, as we saw earlier in this paper, money both as a concept and as a form of payment is evolving fast. The reason for and enabler of this shift: technology. Shortened technology and innovation cycles have allowed other players to challenge the hierarchy in the financial services sector. Banks have their stable and established infrastructures, but their complexity and inertia to change has enabled the influx of tech players to position themselves as primary payment-service providers that are better able to cater to customers’ rapidly evolving expectations. Going beyond the way payments are processed, the construct of money itself becomes unclear. Alternatives to traditional currencies are gaining traction, which could soon enable complete ecosystems to function without banks. While the rules applied to new entrants and new forms of money are still maturing, regulators will catch up. Most countries have launched studies to establish applicable compliance policies to protect consumers, but while this will raise the entry barrier it will not shield the banks against change and challengers will adapt to function within the applicable guidelines. Finally, we saw that consumers are eager to move forward. Not only have they digested recent technological advancements in the digital age, they want more — a lot more. From a single global currency to ethical perspective in the essence of money, the fundamentals are relevance and zero friction. Having in mind the role of banks in today’s payment landscape, these trends seem to indicate a future without them. Short of a rapid reaction, established financial institutions could see their stronghold in the current value chain diminished if not extinguished altogether.

27. PERCEIVED VALUE BY END CUSTOMERS TIME Reclaim client ownership - Develop CX strategy - Create own ecosystem Provide services to CX owners - Clear new currencies - Provide infrastructure Loose control A B CUSTOMERS EXPERIENCE (CX) PROCESSING C D 27 DEVELOPING A STRATEGY: HOW TO STAY RELEVANT As discussed earlier, both objective data and subjective opinion demonstrate a decline in the perceived added value of banks. In the retail payment landscape, ownership of the customer is being lost as other players champion the customer experience. That said, we think financial institutions that adopt a clear strategy can still claim their place. We see the world of payments evolving in two main directions : In one direction, electronic currencies will further support the way people are conducting business and in the other, open-ledger-type digital monies (e.g. Bitcoin) will gain market share. Financial institutions must integrate both into their retail strategy. Ripple Makes Waves U.S.-based Cross River Bank is pioneering the Ripple protocol (a payment system developed by San Francisco start-up Ripple Labs to connect disparate financial networks) to offer real-time international banking between the U.S. and Western Europe. Ripple offers an advanced settlement infrastructure for instant, secure, compliant and affordable cross-border transaction services. In building a ‘digital money’ strategy, all five dimensions of money discussed earlier — type of transaction, mode of transaction, supporting technology, operator/ issuer and substance — have to be considered. Banks need to assess each of these dimensions to ensure a successful digital transformation. Appetite and investment ability in each of these dimensions will dictate how much banks will be able to influence their marketplace position. Figure 10: Evolution of perceived added value by customers

28. BUILD USER EXPERIENCE (INTERNAL PROCESSING STILL REQUIRED) FOCUS ON PROCESSING INTERNAL ORGANISATION BRANDING EXTERNAL POSITIONING 3 4 1 2 Invest in developing customer and user relationships by improving existing assets Launch a new value proposition competing with user experience experts from digital space Organisation Branding Transform existing IT to support partners and competitors and focus on B2B for retail market Create an IT/infra-service provider to support partners and competitors. Deﬁne new offerings and packaging of the IT solution • Lose control and abandon day-to-day payments. Leave this we see different fundamental alternatives for banks to consider when it comes to payments: area to other players to focus on larger transactions or bundled products where payment is combined with other financial products and services. • If you can’t beat them, partner with them. Focus on processing capabilities by investing in infrastructure and core banking competencies to support partners (e.g. retailers or tech companies) or complete ecosystems by forming large platforms with uniform and regulated processes. • Move up the chain. Reclaim the client relationship by shifting focus to where the value for end-users lies (ease, speed of execution, user co-creation and empowerment). Compete directly with new entrants by leveraging expertise in financial advice and more complex money transactions (investments and loans) to dominate the niche. Whatever the selected option, banks’ ability to cope with new forms of money will rest on their becoming either front-end players managing digital money transactions or back-end enablers and/or guarantors of future regulatory frameworks, including controls against risk and fraud, e.g. in cryptocurrency transactions. But the challenge does not end with defining the business model. Largely underestimated, it’s the ability to execute strategy that brings success or failure. Following so-called iceberg logic, 90 percent of the effort resides in translating ideas into results. The matrix shown below proposes a pragmatic view of ways to create a digitally advanced organisation able to compete in a multi-money, real-time, mobile and consumer-centric world. A combination of these options is possible, but we believe that limits the chance of success in a world of scarce resources. The power law suggests large achievements are the result of uncompromised investments rather than being triggered by diversification. If you don’t go all in one direction, some else will do it and gain the right to win. On a similar note, there are grey zones between the options described here. Progressive business and operating models are possible, each of these placing the cursor between internal and external, between utility and end-client ownership. The vertical dimension looks at the oﬀering (external). It is critical to define how the service is positioned in the chain and who the targeted customers are. Value can either be extracted by owning and retaining the client or by enabling partners with expertise in back-end infrastructure and processing capabilities. The horizontal dimension looks at the operating model (internal). Two macro scenarios exist: either the existing institution tries to go through a transformation exercise by enhancing its existing digital channels or an independent entity is created or acquired with the ability to grow as a start-up. 28 Figure 11: Possible strategies for banks

29. “BANKS POSSESS INFRASTRUCTURE, SOLUTIONS AND ESTABLISHED PROCESSES. THESE ARE STRENGTHS THAT THEY SHOULD BUILD ON” Akos Turny, Head of Product Management (Digital Channels), Misys “NEITHER GAFA NOR BANKS CAN ACHIEVE MARKET SUCCESS ON THEIR OWN AS THEY CANNOT PERFORM THE WHOLE VALUE CHAIN OF RETAIL BANKING INDEPENDENTLY” Olivier Crespin, Head of Digital Bank, DBS

30. 1. Leverage internal assets, enable partners: Strengthening back-end infrastructure is an efficient way for banks to gain a competitive edge in the digital age. Given that banks today operate in an environment that spans geographies and languages as well as different regulatory regimes, their systems already allow them to build and transact complex products. Pushing these abilities forward, an extension to cloud computing would not only help banks remove some constraints from legacy IT systems but also enable them to integrate new technologies. With this strategy, payments — and to a certain extent digital money — could be processed, keeping banks at the heart of the system, even if their medium i.e. money, changes form. This strong value proposition could be packaged and offered to partners that have demonstrated their focus on the client experience. Unity bringing strength, a consortium between banks and retailers could represent the winning combination. 2. Build new engines for merging ecosystems: Following a similar value proposition as option one, option two represents the view that transforming the existing entity is not realistic. The complexity of current architectures means even a small change can be a challenge. Considering the magnitude of adaptation required to become a credible player building the next generation of payments, technical rigidity makes it impossible for traditional institutions to manoeuvre fast enough. The logical workaround is to start fresh. Companies are being created with new technologies at their core. NoSQL databases, the latest coding languages, cloud and distributed central processing unit power all join forces to constitute next-generation payment-processing platforms. With option two, investments are made in building rather than in transforming. 3. Stand proud, claim back the client relationship: Customer experience, including the quality of service and ease of use, is a key differentiator in any organisation. A large number of U.S. banks have invested in personal finance management (PFM) software coupled with customer data mining (to consider both small and big data). The aim is to provide more value-added services to customers through smarter insights into what they want and therefore to strengthen their relationship with the bank. Mobile-banking apps such as Standard Chartered’s Breeze mobile have proven successful in enhancing customer interaction and stickiness. Banks are sharpening their focus, but they still have some way to go before understanding customers as individuals (as opposed to segments) — their emotions, their stage of life, their employment and their hobbies and routines. Enhancing the user experience is a continuous process that involves regular updates and improvements to refine operations and strategies. At the moment, payments as a standalone component is not much valued by customers looking for end-to-end journeys such as shopping (including managing vouchers and miles/rewards) or entertainment (including managing bookings). Owning the payment component, banks could facilitate the complete experience though regulatory limitations might force them to do this through links with merchants. Moving up the value chain requires restructuring an organisation in such a way that digital teams are intrinsic to the existing business. This requires bringing in experts who can introduce the overused ‘outside-in’ transformation in the traditional banking culture. Innovative banks should move away from multi-channel offerings trying to marry legacy and new client interactions models. From our perspective, omni-channel means the right channel available any time anywhere, rather than all possible channels. 4. Build new marketplaces, act as facilitators: While option four follows the business objective outlined option three, it differs in two key aspects. On top of the limitations due to legacy architectures, it takes into consideration a major roadblock often faced by banks in reclaiming the client relationship – people. Systems are difficult to change and the clients themselves even more so, consciously or subconsciously resisting a new direction. The reason relates to the fact that banks are traditionally risk-averse. However, evolution means change, and change implies risk. The risks of having a negative impact on the current customer base, disturbing employees, shaking egos or highlighting conflicting agendas are often considered unbearable and therefore annihilate the ability of traditional institutions to evolve to the extent necessary. Given that, building fresh teams without past limitations is the right approach. Venture capitalists tend to think that the team makes the difference and incentives must be aligned. Huge teams and the million-dollar salaries of banking executives might be seen as a weakness rather than a strength when it comes to breaking with current behaviours. 30

31. Strategy Opportunities and Benefits Challenges and Risks 1. Leverage internal assets, enable partners Medium - Considers existing abilities and therefore does not require large transformation - Leverages a strong, secure and reliable banking infrastructure - Enables cross-selling with other products and services - Takes place in a clearly regulated environment Medium - Adapts current B2C model to a B2B2C model - Produces limited revenues generated from processing simple payments - Compounds retention issues of customers due to a reduced engagement - Requires a strong brand already positioned as innovative to appear credible - Necessitates the optimisation of processes to enhance productivity and efficiency 2. Build new engines for emerging ecosystems Medium - Creates a more nimble entity able to cope with the digital environment - Allows real outside-in perspective in developing business and operating models - Uses new technologies at the core of the offering with a dedicated architecture that will fully enable the value proposition with no compromise to existing services Medium - Requires striking the right balance between full independence (and potential conflicting agendas) and leveraging synergies with the mother company - Increases group governance complexity - Implies efforts linked to the development of new branding - Calls for the definition of an applicable regulatory landscape - Entails building a new talented team with limited pressure to transfer staff from the mother company 3. Stand proud, claim back client relationship Medium - Defines new revenue streams to compensate for a drop in existing products and services - Generates client stickiness through end-to-end customer journeys leveraging partners to bring in the rationale (e.g. shopping) - Repositions the complete organisation as a customer-centric entity - Limits efforts required to get buy-in as this is the existing strategy for most banks High - Fosters extreme competitiveness and leaves limited room for partnerships - Implies a significant amount of investments with unclear payback calendar - Slows down implementation speed compared with new players (buy or build) - Requires building on existing legacy architecture - Demands a very high ability to change - Forces play within the banking regulatory landscape while new competitors have more ‘room’ 4. Build new marketplaces, act as facilitators High. - Looks at new client needs and behaviours with a fresh perspective. Existing products and services are only considered in a second stage - Concentrates fully on new strategies with no or limited dependency on legacy and internal constraints - Increases control over customer journeys and partners - Enables generating revenues from different sources, with payment a subcomponent in the offering - Helps appropriate brand positioning High. - Requires identifying the right value proposition in a confusing environment - Necessitates a very strong partnership model with a large number of entities; the bank will play the role of facilitator - Requires understanding the applicable regulatory landscape - Implies the development of an open platform based on latest technologies allowing easy connectivity - Needs a complete branding strategy Figure 12: Details on possible strategies for banks

32. FUNDEMENTALS AND PRIORITIES In day-to-day payments, we believe banks have to make a choice between acting as processing entities and developing their own ecosystem. Staying in the middle will probably not be sustainable. Game plans will depend on different factors but payments will be the domain of the big players. Today a number of companies have entered this space but consolidation is the only way forward in our opinion. All the strategies described above share some fundamentals that have to be considered and which should drive a large part of a bank’s project portfolio over the next two years: • (Next six months) Clarify current and future positioning of the bank in the next decade, which requires understanding the market and the challenges, strengths and opportunities to explore potential scenarios. To avoid the status quo, banks have to make sure the team responsible for these views includes not only traditional bankers but also those with a mindset shaped by the digital age. • (Next 12 months) Work very hard on culture and governance to implement a lean environment with a fast decision-making process (i.e. it should take a maximum of four meetings to reach a decision) and which tolerates some failure. Stay open-minded and foster experimentation. • (Next 18 months) Develop partnership models to easily join or create ecosystems where the value proposition is a combination of products and services. Whether banks will own the customer journey is a larger question, but in the short term they can leverage various data points to improve their knowledge of customers. • (Next 24 months) Improve back-end platforms: Open APIs to increase flexibility and integration with external parties and develop flexibility in IT/infrastructure/processes. • (Continuous) Bring in external perspectives from other industries and leverage crowdsourcing initiatives to identify ideas (not just incremental evolutions). Decentralise innovation projects and establish ‘vertical teams’ to foster an unhindered skills-and-knowledge sharing culture. Don’t discount the ‘black swan’ (referring to Nassim Nicholas Taleb theory). • (Continuous) Get close to solution providers (start-ups or large companies) to contribute and absorb innovation thanks to user groups, conferences or even direct investments. In this changing landscape, the ability to be part of idea creation and early stage execution is key to staying ahead of the game. 32

33. CONCLUSION Technology has always supported the evolution of commercial offerings by enhancing quality, reducing prices and increasing reach to ever-wider geographies. In the digital age, the border between business and technology has almost disappeared and it’s become impossible to say whether it’s IT innovation or new value propositions that came first. On the edge of this rhetorical question, new monies that don’t require banks to operate have emerged. They pioneer architectures and valuation logics that open the door to a world of opportunity or threat, depending on the perspective. The rise of new entrants who not only possess a mindset that mimics that of the end user (the customer) but who also play the card of technology faster and smarter, have moved beyond being a threat to traditional institutions to owning large shares of the market, crystallised by GAFA’s increasing presence. The time has come for bold moves. In this context, digital should not be seen as a chapter in company strategy but as the environment in which any meaningful plans have to be developed, as it both changes value propositions and interaction models within the complete ecosystem (i.e. customers, partners and staff). We believe the payments market will be polarised between the two points described earlier: processing entities at one end with companies owning the end customer at the other. While most banks think they have chosen the latter, the ‘me too’ strategy will have very limited impact. Success in this space will require vision and the ability to take risk in defining the future. Our research shows that this future considers new monies as a credible alternative to traditional currencies. No matter which of the four main strategies (discussed in the previous section) it selects, a bank needs strong conviction to help steer it during turbulent times. But under the cover of trying to provide customers with what they want or what they need, most financial institutions lack conviction (an opportunistic strategy usually means no strategy). Their approach most often involves market surveys and other lengthy consultant assignments, supposedly to discover what people want, but breakthrough innovation cannot be achieved by using average market perceptions. The mean (as in maths) opinion might save banks from big mistakes as much as it will prevent them from creating value. We think winners in the payment space will be those who take risks and are bold. Lukewarm value propositions trying to appeal to the average will likely separate the winners from the losers in the near future. 33

34. 34 APPENDIX/REFERENCES 1) http://www.forbes.com/sites/ryanmac/2014/09/23/paypal-takes-small-step-toward-bitcoin-partners-with-cryptocurrency-processors/ 2) http://www.cryptocoincharts.info/coins/info 3) http://gtnews.afponline.org/Articles/2014/Virtual_Currencies__Learning_to_Live_in_the_Physical_World.html 4) http://www.businessinsider.com/the-wearable-computing-market-report-2014-10#ixzz3QvofyJRD 5) ‘World Payments Report, 2012’ Welcome to the world biggest creative playground! eYeka is a crowdsourcing agency that delivers fresh ideas by leveraging the power of collective intelligence of 300,000 creators that are spanning across the world. Crowdsourcing is an entrenched communication tool for some of the blue-chip clients such as Coca-Cola, Danone, Hyundai, Mondelez, Nestlé, PG, PepsiCo and Unilever. We enable marketers and their agencies to accelerate the creation and marketing of more relevant products by leveraging a wealth of creative ideas developed by our community. Eyeka Asia Pacific Pte. Ltd. 24 Duxton Road Singapore 089488 Tel: +65 6423 0771 Misys is a global software provider for financial services with more than 2,000 customers across 130 countries. Since 1979, Misys has been providing broad and flexible software solutions too cater to different banking domains such as retail, corporate, lending, treasury, capital markets, investment management and enterprise risk. With innovative and unparalleled architecture to address industry requirements, Misys is a trusted solution provider to 47 of the top 50 banks worldwide. Misys Singapore 2 Shenton Way #14-01 SGX Centre 1 Singapore 068804 Tel: +65 6226 6022 Chappuis Halder Co. is a management consulting firm that is focused on providing strategic insights for the financial services sector. With a global presence across three continents and consultants with deep expertise in the various domains of finance, Chappuis Halder Co. has been able to render its capabilities to high level executives of the top financial institutions around the world, including banks such as HSBC, JP Morgan, DBS and BNP Paribas. Chappuis Halder Co 60 Tras Street #03-01 Singapore 078999 Tel: +65 6222 8664 Website: www.en.eyeka.com email: alexandre.olmedo@eyeka.net Website: www.misys.com email: mukul.agrawal@misys.com Website: www.chappuishalder.com email: mchaille@chappuishalder.com pbucquet@chappuishalder.com

35. Chappuis Halder Co. 60 Tras Street #03-01 Singapore 078999 Tel: +65 6222 8664 Web: www.chappuishalder.com

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