March 4, 2016 by 1 Comment
A few weeks ago, Zil blogged about the recent set of reports that he and I wrote on reimagining payments relationships between banks, retailers and Fintech. They were commissioned by ACI Worldwide, and the reports took a perspective of each party. Given the current focus on the topic in the industry, we highly encourage you to read them. But it’s worth just summarising our thinking in a few sentences. Contrary to what many people think, we don’t believe that Fintechs will replace banks, but that all three parties will co-exist, and rather than Fintech being a wedge between bank and client, they will become the glue, and an increasingly important part of the ecosystem. Whilst I trust our insight was unique, the topic certainly isn’t. It seems mandatory to have Fintech in every press release and every conference! What is interesting though is that many people seem to see Fintech in isolation, and that there are many other things happening that are not just enablers, but perhaps multipliers of the impact that Fintech will have. Take PSD2 and the XS2A provision. We’ve covered this numerous times in reports, but in short, is a mandated requirement to allow third parties access to account level information, and the ability to initiate a payment from that account. In theory then, a Fintech can now access your data at your bank and, with your permission, pay anyone directly from your account. In the context of above, what is interesting is the responses we’ve seen from the industry. A few banks have seen the opportunity. Most see it as a threat and/or a regulatory burden they have to fulfill. Few Fintechs seem yet to have publicly declared any interest – or indeed, knowledge! – of the PSD2 at all. The most interesting conversations seem to have been coming from the merchants. They’re exploring the potential to bypass cards. The appeal is obvious – if they become a third party provider, they can get the consumers to push payments directly, with no fees payable by the merchant. Given the growth in real time payments, these will be increasingly good funds, with instant value. One scenario then sees the merchants dramatically impacting the business model of the banks, with card revenues plummeting, with the merchants benefiting from improved cash flow. Yet there are other implications in that scenario. For example, can those merchants actually handle the volume of payments? Is their ERP system real-time, and able to reconcile at the same speed? Are they sophisticated enough to cope in the change in their cash management profile? Yet central to this change remains the bank. Those merchants will need the banks more than ever, not less. The services might change, the business model might change for most of the parties involved, but the requirement remains as strong as ever. Banks are dead? Long live banks!
January 28, 2016 by Leave a Comment
The question in the title of this post has become a rather hot topic lately. Earlier this week, I was kindly invited to join the panel on “what’s hot in Fintech” at Citi’s Digital Money Symposium, and it was one of the central questions we debated as a group. My colleague Stephen Greer has also discussed Bank-Fintech relationships on these very pages, for example, see here and here. The question is not necessarily new. Back in 2011, I wrote a report titled Innovative Payment Startups: Bank Friends or Foes? In the report, I looked at companies presenting at the inaugural FinovateEurope and concluded:
“Banks have little to fear from this particular group of payment innovators. Some solutions actively support the established payment systems, in particular cards. Others are expanding the market by enabling payment transactions in places where they may not have been possible before.”There is no question that the pace of innovation has increased in the last five years since that quote. However, today we also have many startups and Fintech companies that are actively serving banks with their technology tools (from authentication and fraud management to back- and middle-office systems). Others, such as Apple partner with banks to develop propositions that “wrap around” a card transaction. In the last few months, we have also noticed an increase in stories around collaboration between banks and Fintech. Most payment unicorns (private companies with valuation of over $1bn) achieved their impressive scale and valuations mainly by competing with banks in a specific niche and focusing on being the best in class in that area. Often, it is in merchant services, such as those provided by the likes of Stripe, Adyen, Square, and Klarna, while TransferWise is successfully attacking banks in the international payments market. Yet, even among the unicorns there are those that have chosen to partner with banks, such as iZettle which has partnerships with Nordea, Santander, and other banks in Europe. TransferWise, a unicorn that has long been positioning as an alternative to banks, is now partnering with LHV, an Estonian bank, to offer its service via the bank’s online and mobile channels, and is rumoured to be in discussions with “up to 20 banks” about adopting its API. The Wall Street Journal recently quoted Ben Milne, the CEO of Dwolla, as saying, “Time humbles you. Working with banks is the difference between running a sustainable business and just another venture-funded experiment.” It has become fashionable to pronounce the death of banking. The disruption caused by Fintech is supposed to blow the old-fashioned banks out of the water. Of course, we acknowledge the disruption and recognise that banking is changing. We simply don’t agree that banks will disappear — at least not all of them:
- Today’s smartest banks will figure out a way to stay relevant for their customers.
- Some of today’s disruptors are becoming banks (e.g. Atom, Mondo, Starling in the UK)
- Both Fintech and banks are starting to acknowledge the value they each bring to the relationship and will learn to collaborate effectively.
October 23, 2015 by Leave a Comment
We’re smack in the middle of conference season and the team has been traveling all over the world. We’ve been busy with Sibos and BAI (unfortunately held at exactly the same time), AFP, and next week, Money20/20. In only its fourth year this new conference had to move to a new venue so that it could avoid running afoul of the fire marshal. Given the excitement around the payments ecosystem, we think it will be an exhausting whirlwind of a week. What will Zil Bareisis and I be looking for? Three main topics top the list:
- What’s the view on blockchain? There was a lot of discussion at Sibos on the corporate side (we don’t think retail will be leading), but we’d like to find out if there’s heat behind the light.
- What sort of value added services around the payment are in production or on the drawing board?
- Is the apparent stall in mobile payments adoption temporary, and what can be done by ecosystem participants to jump-start it?
October 21, 2015 by Leave a Comment
Our friends at PaymentsUK have released their latest forecasts, the ever excellent UK Payments Market 2015. Whilst we don’t have a copy of the full report (hint, hint…), the press release does give us some interesting insights. For example, payments will hit 44 billion transactions a year by 2024. This is a net growth of 3.4 billion, which hides significant and continued declines in both cash and cheque usage (53% to 33%, and 1.1% to 0.4% respectively). The table provided (and replicated below – the link above has a better quality version) shows that, for consumers at least, cards continue to drive the growth. There are obvious reasons for this: consumers switching from Oyster-like cards to contactless, and indeed, contactless generally, is just one good example. Number of annual consumer payments made per adult One thing that really stood out for me is the final line before the total – the “other” category. Celent’s forecasts typically count prepaid and store cards into our debit forecasts. But what is notable is that PayPal is explicitly mentioned… and mobile payments aren’t. At all. We’ve not seen the full report, so it may be explained there, but given what we read in the press, this is hugely surprising. Recent examples include:
- Nearly half of all UK online payments now on mobile study finds
- Half of UK shoppers to use mobile payment apps this year
October 16, 2015 by Leave a Comment
I am not writing this literally on the plane, but I might well be – this is a conference season, so many of us are on the road. My colleagues have already been blogging from SIBOS, Finovate, Finnosummit and other events. I wanted to share my own observations from the events I attended. EMV, tokenisation, mobile, Blockchain – these were just a few major themes discussed in depth in Las Vegas at PayThink. This used to be known as ATM, Debit and Prepaid Forum and remains THE event to go to discuss these topics in the United States. It is organised by PaymentsSource and chaired (for the last 12 years!) by Tony Hayes, my colleague and Partner at Oliver Wyman. Thank you to the organisers for inviting me to moderate a panel on lessons learned from cards platform transformations, and many thanks to my panelists – senior executives from FIS and e-Global for sharing their insights. We talked about the drivers forcing processors and issuers to upgrade their processing platforms, such as growing transaction volumes and types, need for flexibility and speed when adding new products, and how the processing proposition changes. Processors are now moving away from out-of-the box to componentised solutions, are changing how they package and price their services, and are re-thinking the business terms how to engage with clients. When working with software vendors, our panelists stressed the importance of “soft aspects”. Of course, the technology matters and must meet the requirements to get you on the short list. However, often it will be your people that will win or lose you the deal – flexibility and commitment they demonstrate during proof of concept and other advanced stage interactions are often major factors when clients make a final decision. Last week I was in Lithuania, the country I grew up in and left over 20 years ago… I go back every year, but this was the first time I went there as an analyst. The Central Banks of Lithuania and Sweden jointly organised a conference on the role of Non-Banks in the Payments Market. I was kindly invited to join the panel to discuss “what’s in the future.” As our clients know, our view at Celent is that the disruption in banking is real and that, as a result, banking will change, however, banks will not disappear. Of course, some of them will, but others will adapt, and some of the today’s non-banks will become banks. The challenge for all is how best to manage that tension and the ongoing evolution of the industry. In between travels, I also published a new report on tokenisation, a hot topic in the industry at the moment. The speed of tokenisation evolution in the last 12-18 months has been remarkable, and there are no signs of slowing down. Celent clients can access the report here. Finally, it’s not long before we board the plane to go back to Vegas to Money 2020. The meteoric rise of this event has been absolutely amazing – fours years ago there were about 1,200 of us; this year, the organisers expect 10,000! My colleague Dan Latimore and I will again be there as well. My diary is already full, but if you are a client and would like to say hello, do reach out to your account managers and we’ll do our best to meet up. With everything going digital, the physical handshake remains as important as ever! Safe travels!
August 10, 2015 by Leave a Comment
I am finally a proud user of Apple Pay! It came to the UK on July 14th while I was away on holiday, but I managed to set up my first card even while I was abroad. And I was very proud and pleased when I got back and completed my first Apple Pay transaction. My experience has been more or less as expected. I got an email from American Express announcing that Apple Pay is available and suggesting that I should add my card to it. I have been using my Amex for iTunes, so adding it to Apple Pay was relatively straightforward. Somewhat unexpectedly, I now also get notifications on the phone for all transactions, including those made with a card – I would have thought Passbook would only have my Apple Pay transactions, but I guess it does make more sense to see all transactions on the card in the same place. I also added a debit card issued by my bank. The bank also promoted Apple Pay to me, and when I logged into my mobile banking app, Apple Pay was featured prominently at the top of the “home screen.” Clicking on the banner took me to the screen within the bank app which explained about Apple Pay and had an “Add Card” button. Given that I was already inside the bank’s app having authenticated myself via TouchID, I was expecting that this button would give me a list of the bank issued cards I have and I could add any of them to Apple Pay by just clicking on it. Somewhat disappointingly, I was taken out of the bank’s environment into the regular Apple Pay “add card” process and had to scan my card, wait for the text message with a security code to arrive, and set it up just like I would have done with any other card. I can imagine that what I wanted is perhaps challenging technically, but it still seemed like an opportunity missed to “surprise and delight” me as a customer. When everything works as expected, the transaction experience is brilliant. However, I already expressed my concerns about the reliability of TouchID on these pages before, and they proved to be true – TouchID does not always work for me when trying to use Apple Pay. While this is not much of an issue in a retail setting, it is not something you want when fighting the crowds to get on a tube or train platform during rush hour in London. As Transport for London confirmed in response to a number of complaints about over-charging, you have to touch in and out with the same device throughout the day to ensure the correct fare is charged; touching in with Apple Pay and out with a card or Apple Watch might result in being charged twice, even though all payments might eventually come out from the same card. The other thing is that Apple Pay quickly conditions you to getting transactions confirmed on the phone. Because TfL has daily and weekly caps, it cannot confirm each transaction instantly. Instead, I was charged 10p when I touched in with Apple Pay, with the balance for the day’s travel being charged to my card much later. While this is understandable and a minor gripe, it still contrasts with the experience of other transactions. None of this is TfL’s fault, which deserves plaudits for continuing to improve and give options to how we pay for travel. However, while I will definitely continue to use Apple Pay at the retailers, I am going to stick with a tried and tested Oyster card or a bank contactless card when travelling in London. It is simply not worth fretting every time I approach the gates whether the technology will work at the speed needed to keep the crowds flowing.
June 26, 2015 by Leave a Comment
Yesterday saw very interesting news coming out of Europe regarding a joint venture between 6 European ACHs. To understand why many of us have sat up and taken VERY close interest in the announcement, we need to review some recent history first. Much of this will be covered in more detail in a forthcoming report on ACHs. In the very early days of SEPA, the European Commission made many public comments. As SEPA was as much a political goal as anything, many of these were observations on how the Commission thought the market ought to develop. Given the size of the task and the perceived reluctance to the banks to do anything about SEPA, the Commission narrowed down the observations to a set of specific requirements, eventually culminating in the regulations that made migration mandatory in Euro countries. The downside is that some of the initial elements triggered some activity, but they were never fully pushed through. One such item was the Commissions perceiving their to be an over-supply in payments processors. In the Commissions view, a single market would reduce the 50+ processors to between 5 and 7. That would be enough for a competitive market, but not so many for an inefficient market. The latter stance is based on the fact that processing is broadly a fixed cost business and so the larger the volumes processed, the cheaper the cost per transaction is to process. As a result of this statement was a flurry of activity amongst the ACHs to be one of the “survivors”. It triggered a wave of mergers (Equens is a German/Dutch/Italian merger for example), near mergers (everyone courted everyone else!) and direct approaches to banks and markets to acquire them as customers and boost volumes. But whilst there were mergers, the market broadly remained unchanged. Indeed, some markets chose to build their own SEPA compliant ACH, rather than use the services of a SEPA-ready ACH. There are many reasons for this, not least ownership and control. The announcement yesterday therefore was very significant. At face value, 6 ACHs are going to collaboratively process cross-border SEPA payments. Given the tiny volumes, this isn’t exciting. However, dig deeper, and it becomes clear that Equens – arguably the largest ACH in Europe – is providing all the infrastructure and services to the new company, and the new joint entity company is registered at… Equens HQ. Those other 5 ACHs are considerably smaller – their volumes combined are still dwarfed by Equens. Secondly – it’s for cross-border SEPA payments today but mentions possibly delivering the real-time payments interoperability that’ll be required going forward. That means more ad more services that will be offered by Equens to these other ACHs. It’s particularly noteworthy as many believe that EBA Clearing has been positioning itself to provide exactly that service, and has been leading the discussions. The third point is a broader one. There has been considerably more talk in the last few months about processing, given various elements of PSD2. It’s not yet clear whether the scheme/processor split will apply to “just” card companies, particularly when some of the ACHs process cards. A number of organisations have also mooted whether the XS2A provision potentially provides a way to bypass ACHs – that is break the connection between bank and ACH. Given the range of potential impacts, it seems likely that there will at least some impact. Finally, we are aware of more than one discussion in Europe about the future of that countries ACH, particularly as they ponder on how to deliver a real-time payments solution for that country. All bets are off. The net result suggests to me that we’re entering new phase for payments processors, particulalrly ACH, which has been a relatively stable market for many years. The industry – and technology – is in a very different place than when the discussions happened in c. 2005. What made sense then may not make sense now. We believe that the announcement yesterday will be just the first of a number over the next 2 years. The phrases exciting times and ACHs can be at last mentioned in the same sentence!
May 20, 2015 by Leave a Comment
As many of you know, I’ve been on something of a world tour, which started with Nacha Payments in New Orleans in mid-April. Expect a flurry of blogs as I pass on my impressions from my travels, starting with the Nacha show. Whilst I may live in London, I have global coverage. Payments is an interesting business – whilst its perhaps one thing that unites all businesses and consumers in all countries, and we are moving increasingly to global standards, the finer details show that it is still a parochial business. I don’t mean that negatively, more that payments have evolved over decades, if not centuries, to address specific local needs. That’s why the SEPA project was so difficult – even what we meant by certain terms turned out to be not straight forward. Nacha Payments this year was in New Orleans. For those not familiar, it’s a long standing show focused primarily on the ACH business. It has a very active conference schedule – I was on a panel with Dwolla and BBVA talking about real-time payments – and an exhibition floor. The US is the single largest payments market, so it’s not surprising that the show is very US in focus. What still surprises me, even now, is the fact that in a shrinking list of exhibitors each year, every time I attend there are vendors I’ve never even heard of, let alone am familiar with their products. This demonstrates the size of the market rather than my lack of knowledge! Take-aways for me: What a difference a year makes. Last year, one senior banker said real-time payments wouldn’t happen in the US in his lifetime. This year, it’s seen as a when, no question about if. Indeed, all the talk was about the “secret” (so secret that every meeting I attended asked me about it!) meeting the key Clearing House banks were having to build out the requirements for the Clearing House solution. The general opinion is that the Clearing House is seeking to go live long before the Fed working groups even get close to having a plan for requirement gathering. More on this soon. Business is alive and well. At first glance, the exhibition floor looks notably smaller than the previous year. One thing to note is that the conference is often attended by more junior people, who also get re-certification credits for attending sessions – with so many sessions to choose from, the exhibition hall is often very quiet. Yet all the vendors reported greater numbers of good meetings, with tangible next steps – in short everyone was happy. Which several said wasn’t the case of some of the new sexier shows as Money2020. It strikes me that they’re very different events. Looking overseas. Payments are largely domestic in nature and what works in one country doesn’t always work in another. For example, check technology from the US (which writes 2/3rds of all checks globally) won’t be of interest in Finland (as checks were abolished in 1993!). As such, payment conferences tend to be very domestic in focus. Not a criticism, just pragmatic. Given the changes the US is facing, and given that many other countries have already faced many of the challenges, it was interesting to see such a noticeable increase in conversations seeking an international viewpoint. I don’t think we’re anywhere close to a global market – but the US seems to have taken a significant swing from “not invented here=not relevant” to “don’t re-invent the wheel”. See you next year, in Phoenix!
March 16, 2015 by 3 Comments
This last week the American Banker Retail Banking Conference 2015 was going on in Austin, TX. As expected, it was a great way to read the temperature of the banking industry. The conference was well attended, with broad representation from all institution sizes and markets. There were a couple of overarching themes throughout the event. Competitive pressures on smaller institutions were top of many bankers´ minds. The conference was full of community bankers discussing evolving business models and the pressures its placing on their ability to gather deposits. Customer centricity is forcing a convergence of traditionally segregated value propositions. Large banks are now trying to compete on serving the customer and they´re positioning themselves to look and feel like a community experience. New entrants and delivery models are also opening up the competitive landscape. Consumers are no longer limited by geography when choosing a bank, and they have a growing number of alternative financial options from which to choose. Smaller institutions are finding it hard to overcome some of the barriers of resources and marketing that arise as the competitive landscape broadens. Many presenters discussed developing non-traditional revenue streams. With interest rates low and new regulations following the financial crisis, banks are running incredibly thin margins, and traditional revenue sources are no longer viable. Presentations focused on targeted marketing for “moneyhawks”, new P2P models (e.g. P2P lending), and new payment schemes. A few thoughts on some of the talking points:
- Breaking down omnichannel applications for financial services: Omnichannel within banking was a popular talking point between attendees and among presenters, and it´s obvious there´s still more than enough ambiguity around its application in the context of banking. One of the presentations used non-FI examples to look at how banks can approach integrating omnichannel into customer interactions. Home Depot was an interesting case study. The retailer combines the in-store and app experience to enhance the customer buying process. Customers can browse the app and make a list of the materials they need. The app shows only what´s in stock at the nearest physical location, and each item is given a corresponding aisle number for easy location on arrival. While in the store, customers can scan QR codes on each product to bring up specific measurements and statistics. This is the essence of an omnichannel experience. It´s not about doing everything from every channel—it´s about optimizing the customer experience across the variety of methods used to interact with the retailer (or bank).
- Community banks differentiating from large institutions: This was a common thread running throughout the presentations. How do community banks grow deposits in a climate of shrinking deposit share? Presenters proposed some solutions. One spoke of the need to market correctly. A recent study found that despite problems with megabank perception, 73% of those asked said a recognizable brand was important in choosing a financial institution. A regional bank poll of millennials found that not one could name a community institution in their area. These institutions find it hard to inform consumers about the value they provide, and often lacking the resources and experience to do so. A few small institutions spoke about shifting towards serving small businesses. Despite only having 20% of deposits, community banks are responsible for 60% of small business loans. Focusing on small businesses could be a way for small institutions to remain viable, without having to drastically alter their businesses.
- eCommerce and Merchant Funded Rewards (MFR) through mobile banking to help consumers save: During one of the sessions, a banker made a good point: consumers don´t need help spending, they need help saving. The comment reflected a number of discussions about the role financial institutions can play in helping consumers save money, but was echoed across a handful of presentations on digital commerce. US Bank discussed Peri, its eCommerce app developed in cooperation with Monitise, while other presenters spoke about card-linked and MFR propositions. These initiatives are definitely innovative, but is conflating the ideas of saving and driving commerce shaping the conversation around a fundamentally misaligned approach? First, will a bank´s eCommerce app be able to compete with the likes of Amazon and Google? Banks often do not have the customers, data, or pricing competitiveness to match big online retailers, and they seldom win on brand favourability. Second, even when these initiatives are successful, do they really help people save? For many, the data isn´t targeted enough for banks to offer deals on purchases a consumer was going to make anyway. For example, based on one bank´s demo, a customer would go to make a purchase at a retailer and the bank app would push out a geo-located card-linked offer for a nearby restaurant. This requires additional spending. Without the right data, these programs are mostly playing off impulse purchasing, not saving.
March 13, 2015 by Leave a Comment
Capgemini recently hosted a few dozen consultants and industry analysts to Chicago for their two-day Analyst and Advisor Day event. The presentations were held at the firm’s very impressive Accelerated Solutions Environment facility, with its dramatic curved glass exterior and prime views across the Chicago River to the famous Merchandise Mart. Unfortunately, it was typical Chicago winter weather with sub-zero windchills and snow flurries, but for those who braved the conditions it was a very interesting and informative event. Things appear to be going well at Capgemini. Even though organic growth in revenue was only 3.4% in 2014 (to EU 10.5B), bookings were up 13%, operating margins were improved by 70 basis points (to 9.2%), and profit jumped by a full 31%. The financial services business (covering banking, insurance, and the securities industries) provided Capgemini with significant sales momentum into 2015, with Q4 growth of 9.2% (second only to the firm’s public sector services business). In the financial services sector, Capgemini’s business theme was digital transformation, which in their view would be driven by the replacement of knowledge workers by automation and algorithms. During Q4, Capgemini signed an important deal with First Data Corporation (FDC) to take over application management responsibility for its VisionPLUS card processing platform. VisionPLUS is FDC’s international card platform and serves over 180 clients in 70 plus markets in Central and South America, Europe and the Middle East, and Southeast Asia. John Elkins, FDC’s Chairman of International, came to Chicago to talk up the new partnership, and it appears that FDC is very pleased that Capgemini is taking over responsibility for maintaining and expanding the functional coverage of VisionPLUS. Essentially, Capgemini will work with FDC to continue the build out of the platform, FDC will use the software to drive its own processing business, and the partners will share certain license and managed services revenues for new bank clients. Paul Nannetti’s made an interesting key note presentation covering emerging trends in Capgemini’s business, and several times he mentioned the “40-40 Rule”. This was a new buzz word for me, so I was happy when another analyst asked Paul what he meant by the 40-40 Rule. According to Paul, the 40-40 Rule says that 40% of the scope of new outsourcing contracts will be suitable for digitization (automation), and that within this realm, digitization will drive out 40% of existing labor content. In other words, global outsourcing companies like Capgemini will need 40% less FTEs to process the same work load due to the introduction of automation to its business processes. This brings us to the issue of robots. A few weeks ago, I had read an article about the opening of a futuristic hotel in Japan called Henn-na Hotel (apparently translated as “Strange Hotel”) that will be almost entirely staffed by robots. The hotel will employ robots to clean rooms, staff the front desk, and run the bag room, and guests will be able to unlock their rooms through facial recognition. Hotel president Mr. Hideo Sawada was quoted in the Japan Times as saying “We will make the most efficient hotel in the world. In the future, we’d like to have more than 90 percent of hotel services operated by robots.” Capgemini’s Global CTO Lanny Cohen shared that indeed robotics and artificial intelligence technologies were under close scrutiny at the firm, and the firm maintains a global network of 40 innovation labs to investigate this and other areas of emerging technologies. For a firm like Capgemini whose financial success over the past 10 years has been in large part based on managing a very large off-shore workforce, this is indeed a bold strategy. And that’s also very good news for Mr. Roboto, who may have a future in banking and insurance if he ever tires of his current gig at the Henn-na Hotel. Stay tuned. You can follow the conversation about the day on Twitter here.