Two Ways to Win in Payments

TWO WAYS TO WIN IN PAYMENTS Banks can add value in the world of Instant, Invisible and Free payments via scale and differentiation Accenture Global Payments Pulse Survey 2019

What the global payments industry is becoming, and could become, continues to give incumbent banks reason to worry. Market trends are converging on a future where payments are inevitably becoming instant, invisible and free (IIF). In this new payments world, how will incumbent banks add value and raise their game? What can they do now to reinvent themselves for IIF payments? How can banks both mitigate and capitalize on the upcoming payments disruption to grow customer loyalty, revenues and profitability? We recently posed these and other payments-related questions to 240 payments executives at banks from 22 countries. Drawing upon our deep experience in the payments industry and findings from the Accenture Global Payments Pulse Survey 2019, we see two complementary, interconnected and interdependent ways on how banks can use innovation to add value in the IIF payments world and win big: via scale and differentiation. 2 GLOBAL PAYMENTS PULSE SURVEY 2019 TWO WAYS TO WIN IN PAYMENTS

$500 BILLION IS UP FOR GRABS We estimate that global Figure 1. Global payments revenue payments revenue is likely to 2,093 grow at a respectable compound annual growth rate of 5.5 percent +5.5% to reach US$2 trillion over the 1,514 44% next six years (Figure 1). Consumer payments accounts for 58 percent 42% of this total revenue and are expected to grow at 5.1 percent by 2025; corporate payments comprise the rest and are expected to grow at a slightly faster 1 6.1 percent. Non-cash transactions are expected 56% to grow at 5.0 percent over the same period.2 This 58% projected growth is offering banks that operate in the payments industry the chance to grab US$500 billion Commercial in incremental revenue. Consumer 2019 2025 *RoW = Latin America + Middle East and Africa Source: Accenture Research Global Payments Revenue Model 3 GLOBAL PAYMENTS PULSE SURVEY 2019 TWO WAYS TO WIN IN PAYMENTS

BUT, SEIZING THIS OPPORTUNITY WON’T BE EASY IN THE NEW WORLD OF IIF PAYMENTS 4 GLOBAL PAYMENTS PULSE SURVEY 2019 TWO WAYS TO WIN IN PAYMENTS

Capturing the revenue growth Forty percent of the banking payments executives On average, 77 percent of respondents agree that opportunity of payments won’t we polled see payments as already being instant and payments are generally becoming more invisible as another 38 percent say that payments will become they are progressively incorporated into third-party be easy for those banks which are instant over the next 12 months. More than 90 percent apps or devices, such as wearables, digital wallets, unable to shift to digital business of bankers globally (98 percent in Asia Pacific) agree IoT devices and smart contracts. Seventy-three percent models, a critical mission for that payments are becoming more instant for business- believe payments are already invisible or will be so to-business transactions. In fact, 46 countries now over the next 12 months; even more so for consumer- winning in an IIF payments world. have in place an instant payment solution and 12 more to-consumer (84 percent) and consumer-to-business 3 plan to implement one soon. UK’s Request to Pay, set (83 percent) payments. Uber is a prime example of We see a mix of progressive and disruptive market for launch this year, is a secure messaging service that a service that takes physical payment options, such drivers at work. These include customers’ and will be overlaid on existing payments infrastructures as cash, cards and wearables, completely out of the merchants’ rising expectations for speed and as a flexible way to settle bills between businesses, equation. The no-checkout-required Amazon Go retail 4 convenience; technical innovations like open APIs, organizations and friends. PayPal, as another example store is another good example. With its Just Walk Out Internet of Things and high-speed mobile connectivity; of this trend, is partnering with banks and card issuers Shopping experience, shoppers simply use the Amazon AI and blockchain; digital and regulator-driven fee to offer its Instant Transfer capability to individuals Go app to enter the store, take the products they want 7 compression; national infrastructure upgrades; and and small businesses in North America, giving them and leave with no lines and no checkout. 5 new providers entering the market, such as third-party quick access to their money. Finally, Ripple is using payment initiation service providers. The combination blockchain technology to make cross-border payments of all of these trends is what leads us to the conclusion easier and instant with minimal fees and that, in turn, that we are heading towards a new world in which all is stimulating established cross-border payment 6 payments are IIF. players, like Swift, to up their innovation game. 5 GLOBAL PAYMENTS PULSE SURVEY 2019 TWO WAYS TO WIN IN PAYMENTS

Seventy-one percent of bankers and payments Figure 2. Global payments revenue at risk (US$B) executives agree that payments are becoming free. That number is greater in Europe (93 percent) and 2.7% 3.9% up to Asia Pacific (75 percent) where fee income accounts 14.5% at 8.0% 1,649 risk for for the lion share of total payments revenue compared 38.5% banks to North America (61 percent) where the revenue 1,514 pool is more diverse. Consider that consumer 8.1% 1,393 payments for debit card revenue per transaction dropped 14.6 percent, from $0.34 in 2015 to 8 $0.29 in 2018. Credit card revenue per transaction dropped 11.6 percent, from $1.21 in 2015 to $1.07 9 in 2018. In corporate payments, credit card revenue per transaction dropped 33.3 percent, from $2.76 10 in 2015 to $1.84 in 2018. We are also seeing increased regulatory pressure on fees, including the recent European Central Bank restrictions on non-EU card transactions in Europe and the plenty of new entrants, like Revolut, that are building their customer proposition on lower payment fees. The impact of IIF payments will be significant. Total Non-bank Bank Bank organic Card Competition Pricing Bank Based on our analysis, it is likely to decrease the Payments Payments Revenues growth displacement from non banks compression Payments payments revenue pool by 15 percent by 2025 Revenues Revenues 2019 2019-25 by real time and digital Revenues and may cost complacent banks up to $280 billion 2019 2019 payments attackers 2025 in revenue opportunity loss, globally (Figure 2). While the volume/value tradeoff is still driving Instant Invisible Free Payments Payments Payments growth in total payments revenue, our survey results clearly show an acceleration towards IIF. Source: Accenture Research 6 GLOBAL PAYMENTS PULSE SURVEY 2019 TWO WAYS TO WIN IN PAYMENTS

We also estimate that Figure 3. Global payments operating margin at risk by 2025 IIF payments could push the operating margin for 14.5% payments down to 4.3 percent by 2025 (Figure 3). With such compression, 100% 68.5% margins may become razor thin and even negative for the least-efficient players. 12.7% 4.3% Bank Payments Revenues Payment Cost of risk Operating Revenues loss operating costs margin Source: Accenture Research on annual reports 7 GLOBAL PAYMENTS PULSE SURVEY 2019 TWO WAYS TO WIN IN PAYMENTS

TWO WAYS PROVIDERS CAN EXTRACT MORE PAYMENTS VALUE To protect the economics of their payments businesses, banks will need to define their business and innovation strategies around two approaches that address the challenges of IIF payments. First, scale technology to reimagine how their core payments operations are done to ensure that they continue to benefit from the volume/value tradeoff and second, differentiate themselves by adding value in a low-margin, high-volume business. 8 GLOBAL PAYMENTS PULSE SURVEY 2019 TWO WAYS TO WIN IN PAYMENTS

CREATING SCALE BY REIMAGINING HOW PAYMENTS ARE DONE Innovation in scale is how banks What’s driving this invisibility and disintermediation? Leaders get it. They are implementing scale can address new competitors, According to our survey respondents, it is customer initiatives, such as consolidation, to grow quickly experience at 28 percent and efficiency at 27 percent. and efficiently and remain competitive. Fiserv, for 12 market oversupply and maintain example, is buying First Data which should enable differentiation. So, when providers in the IIF payments world lose it to offer a wider range of technology-powered speed as a distinguishing factor, they will need payments and financial services—from card issuer There’s a host of digital payment solutions to set their sights on leading in price, service and processing to the Clover™ cloud-based point-of-sale available today, many of them powerful and popular. overall quality. Improving any one of these requires solution. Online payment processor Stripe acquired It has created a global environment of undeniable the ability to act quickly and with precision. a laser focus on, first, principles, smart processes oversupply, despite customers’ increased demand In essence, the must-do play is scale. Being able to and effective hiring to scale its business, growing for instant payments and settlements. Consider that quickly develop secure, convenient and completely its employee base to more than 1,400 people and every year the number of unique fintech payments frictionless payment experiences through digital processing billions of dollars for millions of users 13 companies (that also receive funding) skyrocketed services and capabilities without any significant worldwide. Fintechs, in general, are tapping into 11 the customer base and stable capital pools of banks 97 percent from 2015 to 2018, based on our analysis. increase in costs (including regulatory compliance This is exacerbated by the growing pervasiveness of and IT maintenance/upgrade) isn’t just an operational to reach both customer and efficiency scale. embedded payments that are being completed via aspiration; it’s both a matter of survival and ambition. smart assistants or third-party or branded mobile apps—adding to the abundance of payments options. 9 GLOBAL PAYMENTS PULSE SURVEY 2019 TWO WAYS TO WIN IN PAYMENTS

Players can focus on two key actions to optimize their efforts around scale. 1. Drive down costs faster than their 2. Obtain the technological abilities, revenue decrease to ensure that the such as intelligent automation, to volume/value tradeoff remains positive. process payments innovation at scale. This means establishing greater economies In our survey, 18 percent of respondents said that of scale in reaching enough new customers building security into the retail payments transaction at a pace necessary to justify further investment will be the main priority for banks; 22 percent cited in digital innovation and capture moments of scale artificial intelligence, robotics, machine learning and growth opportunities. Tactical examples of and innovative payments hubs as the key platform this include pursuing inorganic growth to increase technology capabilities that they need in adapting core scale and reduce unit costs, attracting new customers systems to high-speed and continuous payment flows. and revenue streams through new value-added services and playing the volume game on price by massively lowering remittance margins in exchange for higher volume. 10 GLOBAL PAYMENTS PULSE SURVEY 2019 TWO WAYS TO WIN IN PAYMENTS

FINDING NEW MARKET DISTINCTION IN THE EYES OF CUSTOMERS In the IIF payments world, That being said, a piece of banking that is making differentiation will go to lots of money and growing is transaction services. Revenues at the 10 largest global transaction banks hit whomever owns the customer an eight-year high in 2018 due in large part to a cash relationship. Rather than management surge and stabilization in traditional 14 become the dumb-funding trade finance. Important opportunities still exist in certain payment areas, such as FX. For example, the platforms for other companies’ flow of money between individuals across national information-rich payments boundaries totaled $689 billion in 2018, benefitting businesses, banks must find new companies such as Western Union and Moneygram15 but also creating an attractive market opportunity ways to add value to customers, for new entrants, like Transferwise. make money and grow. 11 GLOBAL PAYMENTS PULSE SURVEY 2019 TWO WAYS TO WIN IN PAYMENTS

To build off that money-making momentum, banks can draw on three tactics to better differentiate their payments business and increase revenue and profitability. 1. Customer-centric 2. Open Banking for corporates insight, far beyond the typical of income, gender, value-added services marital status and location. Based on our research, Borrow from the retail business as a model and 69 percent of banks aspire to sell raw data within Focus on customer-centric and value-added services, zero-in on providing the last-mile of connectivity three years. Already 20 percent of banks monetize even if the payment itself is free. This might include to offer solutions to corporate customers as part data delivering actionable insights and 75 percent building an aggregator role in the online, mobile and of Open Banking ecosystems, even if it is invisible aspire to do so in the next three years. However, instant payment segments, and developing cross- to the end customer. For 17 percent of the survey customers’ data protection concerns (14 percent) channel payment platforms (for example, PoS, APIs and respondents, establishing internal start-up incubation and operational complexity (13 percent) are the microservices). Or, establish digitalized and differentiated units that are isolated from legacy processes to top barriers to monetizing customers’ data. customer experiences for priority segments, such as boost innovation will be the main priority for banks. tailoring service packages for commercial payments. Fraud management is a good example of a data- 3. Data monetization driven service. Other forms of data monetization, Stripe, for example, offers online payment processing Focus on monetizing data flows—selling raw data or such as offer presentment and redemption, are far for e-commerce businesses of all sizes through a suite delivering actionable insights—arising from payments less developed. The potential for data monetization 16 remains strong but will evolve over the long term of payment APIs. BBVA and other banks are launching activity to compensate for core payments becoming apps for ordering ahead and paying through the app. free, even if data plays are still early in their maturity with services more loosely aligned to core processing The apps automate payments but also lets customers cycle. Modern data analytics enables new levels of while other data monetization services progress reserve a table, order food, pick it up, check the bill, pay target segmentation where banks and their corporate more slowly from concept to revenue generation. 17 the bill and so on without waiting in line. These types clients can plan and execute more relevant products of integrated payments are now becoming standard and services based on much broader consumer in many quick service restaurant chains around the world, helping improve the dining experience. 12 GLOBAL PAYMENTS PULSE SURVEY 2019 TWO WAYS TO WIN IN PAYMENTS

UNLOCK SCALE, DIFFERENTIATION OR BOTH IIF payments are no longer a question of if, but how soon. And when they come, how will traditional payments players protect the economics of their payments business, differentiate themselves, stay relevant and make money? Those that embrace and acquire the ability to scale their businesses and deliver for their customers will be positioned for breakthrough outcomes, including differentiating experiences…even in the IIF payments world. Accenture Payments can help. We assist payments providers in transforming their payments systems and operations to grow and win in the digital ecosystem. We offer services that support the entire payments value chain and can help improve provider costs and value outcomes—thus creating innovative, compelling payments offerings and experiences for businesses and consumers. 13 GLOBAL PAYMENTS PULSE SURVEY 2019 TWO WAYS TO WIN IN PAYMENTS

References 12. MarketWatch, “Five payment system deals that Contact the authors could follow an already big wave of M&A,” April 3, 1. Accenture Research Global Payments Revenue 2019. https://www.marketwatch.com/story/here- Model 2019 are-5-payment-system-deals-that-could-follow- Alan McIntyre 2. Accenture Research analysis on global data 2019 an-already-big-wave-of-ma-2019-04-03 Senior Managing Director – Banking 13. SAASTR, “Avoid Trapdoor decisions: 5 lessons [email protected] 3. InstaPay Tracker. https://www.instapay.today/tracker learned from scaling stripe,” March 26, 2019. 4. Request to Pay. https://www.requesttopay.co.uk https://www.saastr.com/avoid-trapdoor- decisions-5-lessons-learned-from-scaling-stripe Sulabh Agarwal 5. Digital Transactions, “PayPal launches Instant Transfer 14. S&P Global, “Global transaction bank revenues Managing Director – Payments in Canada using Visa Direct,” July 2, 2019. https:// hit highest level since 2010,” March 6, 2019. [email protected] www.digitaltransactions.net/paypal-launches-instant- https://www.spglobal.com/marketintelligence/en/ transfer-in-canada-using-visa-direct news-insights/latest-news-headlines/50403778 6. Ripple. https://www.ripple.com 15. CNBC, “Money transfers in seconds. Gareth Wilson 7. Amazon.com. https://www.amazon.com/ A start-up that is trying to usurp Western Managing Director – Global Payments b?ie=UTF8&node=16008589011 Union and shake up the $689 billion money [email protected] transfer market,” May, 18 2019. https://www.cnbc. 8. Accenture Research analysis on Global Data. com/2019/05/17/a-start-up-trying-to-upsurp- Revenue per transaction includes interchange fee western-union-in-money-transfer-market.html Luca Gagliardi and currency conversion fee; other fees are excluded. 16. Stripe. https://stripe.com Senior Principal – 9. Accenture Research analysis on Global Data. Accenture Research, Banking Revenue per transaction includes interchange 17. The Banker, “Invisible payments move [email protected] fee and currency conversion fee; other fees into sight,” May 1, 2019. https://www.thebanker. and interest revenue are excluded. com/Transactions-Technology/Invisible- payments-move-into-sight Contributor 10. Accenture Research analysis on Global Data. 11. Accenture Research analysis on CB Insights data. Dominika Bosek-Rak Research Specialist – Accenture Research, Banking [email protected] 14 GLOBAL PAYMENTS PULSE SURVEY 2019 TWO WAYS TO WIN IN PAYMENTS

About the Accenture 2019 About Accenture About Accenture Research Global Payments Survey Accenture is a leading global professional services Accenture Research shapes trends and creates data Accenture conducted an online survey of 240 retail company, providing a broad range of services and driven insights about the most pressing issues global and corporate payments executives globally from the solutions in strategy, consulting, digital, technology organizations face. Combining the power of innovative largest banks in the following countries: United States, and operations. Combining unmatched experience research techniques with a deep understanding of Canada, United Kingdom, Germany, France, Spain, and specialized skills across more than 40 industries our clients’ industries, our team of 300 researchers Italy, Sweden, Finland, Denmark, Norway, Australia, and all business functions—underpinned by the world’s and analysts spans 20 countries and publishes hundreds Japan, India, Hong Kong, China, Singapore, Thailand, largest delivery network—Accenture works at the of reports, articles and points of view every year. Indonesia, Malaysia, United Arab Emirates, Brazil and intersection of business and technology to help clients Our thought-provoking research—supported by Mexico. The survey was conducted between February improve their performance and create sustainable proprietary data and partnerships with leading 14, 2019 and March 10, 2019. The overall margin value for their stakeholders. With 482,000 people organizations, such as MIT and Harvard—guides our of error is +/- 1.55 percentage points at the midpoint serving clients in more than 120 countries, Accenture innovations and allows us to transform theories and fresh of the 95th percentile confidence level. drives innovation to improve the way the world works ideas into real-world solutions for our clients. For more and lives. Visit us at www.accenture.com. information, visit www.accenture.com/research Stay Connected www.accenture.com/banking Accenture Banking www.accenture.com/PaymentsPulse @BankingInsights Accenture Banking Blog Copyright © 2019 Accenture. 190743 All rights reserved. Accenture, its logo, and New Applied Now are trademarks of Accenture. 15 GLOBAL PAYMENTS PULSE SURVEY 2019 TWO WAYS TO WIN IN PAYMENTS