Digital Disruption in Payments –
Innovation at the Speed of Digital
1SOURCE: Press search
“Payments is a
huge business […]
We’ve created an
entirely new
payment process”
– Tim Cook,
CEO Apple,
Sep 2014
“We are on a
collision course
with the Googles
and the Apples of
the world. Would
you ever pick a
fight with those
types of
companies? No,
but we are on that
course”
– Dave McKay,
CEO RBC; Mar
2015
“We particularly
are excited about
our payments
business in total.
We are going to be
very aggressive in
growing this
business, and we
will be
disappointed if we
don’t announce
some exciting and
potentially market-
changing
ventures.”
– Jamie Dimon,
CEO JPMorgan
Chase, Apr 2015
“Two decades ago,
Bill Gates
described banks
as “dinosaurs” that
would be
bypassed by
innovative
technology. Yet
since then banks
have survived
challenges […].”
– Wall Street
Journal,
Jan 2015
“The Problem With
Apple Pay And
Samsung Pay Isn't
The Tech, It's The
Banks […] The
chatter around
mobile payments
has transformed
into arguably the
biggest story in
tech. And it's not
necessarily a
positive story.”
– Huffington Post,
Mar 2015
Payments has become the stage of a battle by press release
2SOURCE: McKinsey Panorama Fintech Database
Distribution of Fintech activity …% # of startups
and inno-
vations as %
of database
total1
1 350+ commercially most well-known cases registered in the database, might not be fully representative
2 Includes small-, and medium enterprises
3 Including Large corporates, Public Entities and Non-banking financial institutions
4 Includes Investment Banking, Sales and Trading, Securities services, retail investment, mutual funds and asset management factory
4%
2%
13%
3%
2%
12%
8%
1%
14%
24%
11%
5%
Payments has become is the epicentre of Fintech innovation…
3
… And represents a strategic part of a bank’s customer franchise
1 Illustration for annual income on direct bank customers based on ING Direct analysis
SOURCE: ING Direct investor presentations
ESTIMATES
Annual income per digital customer1 Income sources per digital customer1
Indexed
Customers
with
payment
account
Y0 Y+1 Y+2 Y+3
140 120
100 X 1.6 X 2.5 X 2.7
220 295
105
285
Indexed, Y+3
85
135
32
53
65
105
Customers without
payment account
515
285
Customers with
payment account
X 2.7
Mortgages
Payment account
Investment products
Savings
Customers
without
payment
account
4
Major disruptions are reshaping the Payments Ecosystem
Description
Next wave of regu-
latory intervention
▪ Issuance of new rules and regulations is
accelerating, in particular in form of economic regulation
and new rules on data privacy, security and data access
Payment network
infrastructures are
being enhanced
▪ Over 22 markets around the world (incl. UK) are
upgrading national payments infrastructures to be
faster and more flexible, a.o. enabling micro-lending,
real-time P2P
Costly battle for
liquidity continuing
▪ While the battle for liquidity has been easing since the
crisis, the low interest rate environment is reducing
cross-subsidization from account balances
Payments security will
remain at the forefront,
more than ever before
▪ Accelerating threat of cyberattacks is fueling demand
for more secure, real time solutions
▪ EMV, encryption, and tokenization are moving to the
top of executive’s agenda
Technology-enabled
evolution in user
behaviors
▪ Improved convenience, efficiency and value unlocked
through technology, e.g.
– Integration of “Payments” into the consider-
evaluate-buy-bond value chain for consumers
– Omnichannel & cloud-based solutions with
broader service offer for merchants
– Digitization of the AR/AP value chain for e-
invoicing and data-rich solutions for B2B
Induced changes for
banks
Margin pressure on
core Payments
services
A
Increased
competition, both
from the banking and
non-banking space
B
Emergence of new
business and
operating models
C
New systems and
solutions, calling for
investments in
innovation and
technology
D
SOURCE: McKinsey Global Payments Practice
5
-24
-24
-9
-3
-15
▪ Interchange fee (IF)
caps in place across
Europe since Jan. ’15
(0.3% for credit, 0.2%
for debit); a ~60%
drop vs. current levels
▪ Equivalent or
greater drop in
Merchant Service
Charges (MSC)
expected
▪ Further pressure
foreseen through
opening for cross-
border acquiring
Debit fees (%) for average transaction of EUR 50 CAGR
%
Evolution of interchange fees Recent context
0.070.180.180.19
0.070.420.420.44
0.070.680.87
1.40
2015E12082004
0.070.190.180.10
0.070.410.47
1.50
IF cap at 0.2% or 7 cents, whichever is lower
Interchange fees have been decreasing across Europe
SOURCE: McKinsey Global Payments Practice
MARGIN PRESSURE ON CORE PAYMENTS SERVICES
A
6
A wide variety of players could shape the competitive landscape in
payments going forward
SOURCE: McKinsey Global Payments Practice
INCREASED COMPETITION, BOTH FROM THE BANKING AND NON-BANKING SPACE
B
Strategic objectives
Digital
payment
specialists
▪ Aim to capture high revenue use-cases first and expand to higher
volume (in-store) environments
▪ Launch sequential new product delivering ‘merchant value creation’ to
specific sectors
Tech
giants
▪ Aim to collect customer data to enhance advertising and create new
commerce options
▪ Launch new customer experience solutions leveraging partners to
reach scale and credibility
Banks
▪ Aim to generate transaction and liquidity revenues and to protect
customer relationship
▪ Launch sector solutions or stand-alone lead product for customer
acquisition
Networks
and
processors
▪ Aim to increase and retain volume of payments to generate transaction
revenues and scale
▪ Launch sector solutions through partnerships and seek for value chain
expansion
Telco
▪ Aim to reduce customer churn and find alternative revenue models
▪ Launch sector solutions or partner with networks to launch bank-like
payment products
▪ Aim to increase in-store traffic, generate new sales opportunities and
optimize costs (i.e., avoid transaction fees)
▪ Launch innovative shopping solutions leveraging low cost payment
products and customer log-in
Retailers
7
Apple Pay announcement is not quite ‘revolutionary’, but it is a
significant Payments development on several fronts …
EMERGENCE OF NEW BUSINESS AND OPERATING MODELS
C
Product enhancements
▪ iPhone now comes in two different sizes matching
offerings from Samsung
▪ iWatch has seamless integration with phone and
cloud
▪ Apple Pay leveraged cloud, NFC and thumbprint
security to offer the most secure mobile
payments solution
Payment platform
▪ NFC enabled device
▪ Secure element that “bonds” the card to the phone
▪ Tokenization (EMVCo spec)
▪ 6 tokens resident in phone and tied to partner
networks
▪ Wearable tap and go w/ TouchID on phone and
watch
▪ In-app, one-click payment with iTunes
SOURCE: McKinsey Global Payments Practice
8
Online payment has become the norm, feeding an internet finance
ecosystem in China
5
19
76
Cash on
delivery
Online
banking
3rd-party
payment
What payment method do you usually use?
% of CE online shoppers, N=236
RMB10 tn
RMB9 tn
RMB60 bn
Internet
finance
3rd-party
payment
P2P
lending
Market share of online 3rd party payment
% TX valueOthers
Tenpay
50 Alipay
20
20China Unionpay
11
EMERGENCE OF NEW BUSINESS AND OPERATING MODELS
C
9
Alibaba’s financial ecosystem centers around
its ecommerce platform
May
2003
Apr
2008
B2C platform
New
brand in
2012
C2C
platform
Feb
2008
Alipay
launched
Mobile
payment
B2B platform
Inter-
national
China
June
2007
Data based SME
lending service
with banks
June
1999
3rd party
payment
platform
Aug
2003
June
2010
Micro lending
companies
Sep
2012
Guarantee
companies
▪ Shangcheng
Financing
Guarantee
(Chongqing)
▪ Provide
guarantee
service to
SMEs
Nov
2011
Trade finance
service
July
2014
Unsecured
SME lending
with banks
▪ SME loans
by banks
based on
online
transaction
histories
Feb
2013
Online P&C
insurance company
▪ Products targeting
at Taobao/Tmall
sellers
June
2013
Alipay launched
Money Market
Fund Product
Yue’Bao
▪ Cooperate
d with
Tiaohong
Fund first,
later
acquired it
▪ Two banks
▪ "e-Daitong“
with CCB“
▪ Yirongtong”
with ICBC
▪ Yidatong
(Trade
finance
service)
▪ Outsourced
import/export
service for
SMEs
▪ Zhejiang
(2010)
▪ Chongqing
(2011)
Jan
2015
Establish
personal and
business credit
management
▪ Ali Sesame
credit
management
to build
financial credit
services
Ali Ant group
launched equity
crowdfunding
platform
▪ Provide equity
crowdfunding
for startups,
especially in
ecommerce
domains
May
2015
EMERGENCE OF NEW BUSINESS AND OPERATING MODELS
C
10
▪ Alibaba
▪ Taobao
▪ Tmall
E-
Commerce
platforms
Payments
Financing
Wealth
manage-
ment
Building on success of ecommerce, Alibaba grew first into payment,
then financing and wealth management
Product Description
▪ Microfinance ▪ Microfinancing service to SME
▪ Guarantee ▪ Enhance credit for Alibaba microfinance's securitization
products
▪ Insurance online shops ▪ ~50 insurance companies set up flagship stores in
Taobao.com
▪ Products include auto insurance, accident and health, etc
▪ Mutual fund online shops ▪ 1st batch of 10+ mutual fund companies will launch in the
trial period
▪ Alipay ▪ Payment service
▪ Credit payment ▪ Credit payment
▪ Zhongan.com ▪ Online P&C insurance company, a JV with Tencent,
PingAn, etc.;
▪ Yu’ebao ▪ A monetary fund
▪ Dingcunbao
(Term deposit)
▪ term deposit product on Taobao allowing direct deposit
on the Alipay financial management page
▪ Yidatong (Trade
finance service)
▪ Outsourced import and export clearencing service
provider for SMEs
EMERGENCE OF NEW BUSINESS AND OPERATING MODELS
C
11
Alipay expediting mobile development and
exploring innovations
Alipay
Wallet
Super
Payment
▪ Smartphone as POS: APP installed in merchant smart
mobile device or offline POS terminal at earphone port
▪ Facilitate money collection by approved merchants into a
designated Alipay account
▪ QR code/bar code payment: payment info acquired via
bar code reader or mobile app
▪ Voice payment ("Dang Mian Fu"):payment info read
through a ultra-sound signal sent by smart phone, available
on some vending machines in Beijing & Shanghai
Alipay's ongoing innovations in mobile and finance
EMERGENCE OF NEW BUSINESS AND OPERATING MODELS
C
12
Offline
Payments
Strong
promotion
campaign
Cheaper
for
merchants
10% discount (Max:RMB5) per first
spending everyday above RMB2
Get 10% off
for the first spending
Barcode-based payment
at cashier
Promotion campaign – 10% off▪ Merchant scan the consumer’s Alipay
barcode/QR code to direct transfer balance
from consumer’s alipay account to merchant to
fulfill the payment
▪ Enabled the smartphone based cardless
payment
▪ Promotion campaign for barcode payment in
convenience stores, covering 15,000 stores
under 20 brands in 21 cities
▪ Cash benefits in convenience stores to drive
user adoption
– Get 10% off (Max:RMB5) for the first
spending everyday above RMB2
– Get RMB 5 if spending over 5
▪ During promotion: free of charge for amounts
under CNY 20,000, 0.6% for above CNY 20,000
▪ After promotion is ~0.6% of transaction value
(compared to 0.78% for POS machine)
AliPay’s merchant offline payments
AliPay introducing barcode payments through a strong
campaign at convenience stores to penetrate into offline
payment
EMERGENCE OF NEW BUSINESS AND OPERATING MODELS
C
13
P2P transfers
Account Balance
Payee account #
Transfer amount
Voice msg
Next step
Withdraw Deposit
Shanghai
Your return has beaten:
cumulative
return
7-day
annualized rate
Absolute return
in past 7 days
Absolute return
in past 30 days
Lucky
Flying
Wish u
prosperity
May wealth
come
Yuebao
Transfer to Alipay Account
Daily updated peer &
performance comparison
motivates users to check
balance daily
▪ % of users you have beaten (in
terms of absolute return) in the
same city
▪ Yesterday return
▪ Cumulative absolute return
▪ 7-day annualized rate of return
(performance indicator for
monetary market fund)
▪ Absolute return in past 30 days
▪ Absolute return in past 7 days
P2P Transfers
▪ Users can send messages
(text & voice) and emoticons
along with P2P transfers
‘Gamified’ user experience incentivised usage of Alipay’s P2P
payments and investment products
EMERGENCE OF NEW BUSINESS AND OPERATING MODELS
C
14
Alipay: Emerging International ambition
▪ International customers who
buy goods and services from
local Chinese merchants
▪ Clients of Escrow can enjoy
Alipay-like “Guarantee
Payment” service so as to solve
the trust issue between Chinese
merchants and them
▪ Work with Boarderfree to enable
leading retailers and brands (ie Macy's
and Neiman Marcus) in providing
cross boarder shopping for Chinese
consumer
▪ Pay by RMB, no international credit
card needed
▪ Work with international duty
free store, ie Lotte in
providing alipay offline
payment
Global-> China China->Global Global China travelers
EMERGENCE OF NEW BUSINESS AND OPERATING MODELS
C
15
Sep
2005
Feb
1999Jan
2011
payment
based on
Ten Pay
Aug
2013
License in July
2014; launch in
Q4 2014
Webank
First internet
based bank
▪ Focus on micro
loans business
▪ Targeting at
individual
customers and
small business
Incorporate
Taxi App
Jan
2014
▪ Used for
order taxi
▪ Complete
Payment
from
QR code scan
payment
Feb
2014
▪ Scan Q-R code
provided by
merchant to
complete
payment
Ecosystem
based on
Go Dutch Wealth Lottery
Order Taxi Specials Movie
Tickets
Lucky
MoneyGames
Group
Buying
Instant
Messenger
Paipai.com
C2C Platform
▪ Most popular IM
tools in China
▪ Over 200mn
users
▪ Launched value
added product
including
emotion, skin
Ten Pay
3rd party payment
Platform
▪ QQ users can
open shopping
account
automatically
▪ Leverage the
existing
customers of QQ
and Paipai.com
Smart phone
based IM and SNS
▪ Over 600mn
user
▪ Most popular IM
and SNS in
China
Feb
2015
Hongbao
feature
Smart city
collaboration
▪ Work with
Sichuan
province to
collaborate on
smart city digital
initiatives, as e-
government,
online
healthcare, etc
May
2015
▪ Collaborate
with CCTV for
new year
hongbao
distribution
Tencent building a financial ecosystem around its social
network platform
EMERGENCE OF NEW BUSINESS AND OPERATING MODELS
C
16
Public
account
▪ Enterprises, celebrities or media run public accounts in WeChat
while users can follow them
Description
Value-
added
services
▪ WeChat users can purchase Tencent’s value-added services
like games, emotion packages, with WeChat payment
O2O
(Online-to-
offline)
▪ Q-R code:
– Vending machines (collaborate with Gaopeng and Ubox)
– Offline merchants
▪ Taxi service (collaborate with Didi3)
Others▪ Other payment services (ie AA
payment, red pocket etc)
E-
Commerce
▪ B2C website shopping
▪ Weituangou (group buying)
▪ Movie ticket booking
Wealth
manage-
ment
▪ Collaborating with China AMC, WeChat has launched a
Yu’ebao-like product named “Licaitong”
WeChat Payment
1 Launched in Aug 2013
2 As of 2013 Q3, while the largest, Alipay, has a market share of 49%
3 Tencent has strategic investment in Didi taxi
Provide
3rd-party
payment
license
▪ 600 million
users
▪ #2 3rd party
payment
▪ 200 million users
Tenpay
Launch
With a customer base of 600 million, WeChat launches
payment service in version 5.01
EMERGENCE OF NEW BUSINESS AND OPERATING MODELS
C
17
WeChat payment P2P red packet campaign signed up millions of
users overnight during Chinese New Year
Lucky pocket
Send History More
Step 1: Click “Send”
Lucky pocket
# of red
envelops
Total
amount
Message
Pay Now!
Step 2: Create a lucky
Bank card 1
Choose a card
Bank card 2
Add new bank card
Continue
Step 3: Choose a bank
card
Please input password
PayCancel
Step 4: Input the
password
Lucky pocket
Sent to fd Post in
Circle
Step 6: Share the lucky
pocket with friends
Lucky pocket
Send another
Step 5: Click the right-
top sharing button
▪ Lucky pocket receivers will
get random amount of
money summing up to the
total amount set by the
sender
From Jan 30 to Feb 8:
▪ ~10 million WeChat
users have been
engaged in the Lucky
Pocket APP
▪ Over 40 million red
pockets were
dispatched
EMERGENCE OF NEW BUSINESS AND OPERATING MODELS
C
18
Tencent is building the O2O ecosystem around payment to increase
user sickness and transaction frequency
Taxi service
Step 1:
Choose “Didi taxi”
Step 4: Enjoy the service
Step 3: Input your mobile
number and verify
Mobile number
Verification #
Verify
Confirm
Step 6: Successfully
make the payment
Step 2: Input your current
location and destination
From
To
Tips
Call a taxi now
Step 5: Input the amount
and pay using WeChat
Input the payment amount
Confirm
Pay in cash
▪ Collaborate with Didi
taxi
– Cover 32 cities
– Over 350K drivers
▪ subsidizes every
transaction to get mass
market
1 month after
partnership
▪ Transaction # paid by
WeChat: 21 mn
▪ Didi taxi users: 40 mn
(~20 mn before the
partnership)
EMERGENCE OF NEW BUSINESS AND OPERATING MODELS
C
19
Technology driven digital disruption in industries follows common
patterns – Payments are at the centre!
SOURCE: McKinsey Global Payments Practice
NEW SYSTEMS AND SOLUTIONS
▪ Point of sale ▪ Friends and
community
▪ Device providers
(iOS, Android)
▪ Consumer
reviews
▪ Distribution
Changed
economics
Physical goods and
store
Digital goods
and store
Physical
good,
digital store
Software-as-a-
service
Music
Films
Travel
Software
Banks
Included in
consumer
ecosystem
D
20
Example: Alipay voice payment ‘Dang Mian Fu’
(Click to play video)
DNEW SYSTEMS AND SOLUTIONS