PAYMENT

PRIORITIES:
FOUR THEMES
DRIVING
CHANGE
 EXECUTIVE
SUMMARY

Global trends, changing business models and innovation are creating a new set of challenges
for the world of payments. New entrants, able to facilitate their own payment processes,
are both a threat and an opportunity to many existing financial services players in the
ecosystem. However, the need to support new payment methods, handle new payment
channels and launch more innovative products more quickly is placing even more demands
on systems already creaking under the strain.
This paper explores key themes driving change in payments and assesses the likely impact
of open banking and real-time payments. It also highlights challenges that stem from the
management of network complexity and the multiple facets of globality that persist.

Open banking is now a reality in Europe, driven in
part by regulation but also by the desire to improve
customer experience in the face of possible big tech-
driven competition and the need to expand future
revenue streams. In the U.S., The Clearing House
has rolled out a comprehensive real-time payments
system, while usage of Zelle — the bank-backed
offering in the lucrative person-to-person (P2P) sector
— is surging, with Bank of America estimating the
network processed close to $40 billion in Q2 2018,
a massive jump from the $25 billion in the previous
quarter.
The requirement for real-time payments to support all
payment types — including P2P, business-to-business
(B2B), business-to-consumer (B2C) and consumer-
to-business (C2B) — is forcing radical change to
legacy systems that have reached their limits. Solving
the challenge of integrating real-time payments into
existing infrastructures and driving value, reducing
transaction costs and delivering new services is a
conundrum that must be solved and soon. Some
banks are throwing caution to the wind and opting
for wholesale transformation, while others are content
with steady, incremental change. In both cases,
managing the complexity of an environment full of
FinTech competition, digital expectations, and shifts
in regulatory and security compliance is of the utmost
importance.
Even the once mundane cards market is having to
face up to the possibility of disruption as merchants
consider real-time, bank-to-bank transfers as a way
to reduce interchange fees, gain direct access to
valuable transaction data and pass on savings to
increase customer loyalty. In fact, maintaining a high
level of customer satisfaction has never been more
important, as social media provides a powerful outlet
for consumers to voice discontent, and FinTechs loom
as appealing alternatives.
Platform providers (Google, Apple, Facebook,
Amazon, Alibaba, etc.), digital wallet providers, money
transfer apps, mobile POS providers and digital-only
banks are but a few of the disrupters that will continue
to chip away at established players, not least because
they embrace and enable globality. This relatively new
term refers to the ability to work with existing and
new payment networks around the world with ever-
decreasing cost. It is also a phenomenon that is being
driven by the appetite of Chinese and Asian tourists
for international travel and their reliance on apps such
as AliPay and WeChat, which are entrenched in all
aspects of commerce and payments in home markets.
Real-time payments, open banking disruptors,
globality and increasingly complex payment networks
are driving change in today’s payments landscape.
Together, they form the defining issues for the future
of payments.

2 Payment Priorities: Four Themes Driving Change

 1 OPEN BANKING
January 2018 saw the arrival of open banking in
Europe with the rollout of the revised Payments
Services Directive (PSD2), which includes new rules
that require financial institutions to open access to
client accounts to approved and client-authorized
third parties. The goal of open banking regulations
is to transfer ownership of the account from banks
to the customer. This new regulation has ushered
in a new banking era where data and services can
be accessed securely by third parties and will most
likely be enabled through Open APIs (Application
Programming Interfaces).
Given its own open banking regulation, the U.K. is a
great example of how countries are implementing
PSD2. The U.K.’s local designated authority, The
Competition and Markets Authority (CMA), has
mandated that the nine biggest banks and building
societies (The CMA 9) open access to third-party
providers that have been registered and approved by
the Financial Conduct Authority. The list of regulated
providers has continued to grow since the law went
into effect, with announcements of new providers and
services in our in-boxes daily.
In the European Union and the United Kingdom, PSD2 and the
Open Banking Initiative are giving more control to the customer
over personal account data. Digital banks such as N26 and Fidor,
and digital lenders (e.g., Klarna) are seeking to reinvent banking.
In the U.S., large banks are striking
data-sharing deals with individual
partners in a departure from the
aggregator model. Examples include
Chase’s partnership with Intuit and
Wells Fargo’s partnership with Xero
and Finicity.
Source: McKinsey Payments Practice
By making it easier for challengers to enter the
market, and established players to create new
value propositions that extend their reach beyond
their walls, open banking is designed to increase
competition within the industry, which for so long has
been dominated by just a few big names.
THE U.S. AND BEYOND
The banking sector in the U.S. is a much larger, more
complex and competitive system than in the European
Union and U.K. While additional regulations seem
unlikely in the current political environment, FinTechs
have leveraged APIs and screen-scraping technology
for years to enable personal financial management
software and present bill details on bank websites.
To date, however, these connections have been used
primarily to share information rather than to transfer
funds. FinTechs like Mint.com (now owned by Intuit)
pioneered the concept of independent financial apps
that aggregate various bank accounts and credit cards
to provide consumers with a 360-degree view of their
finances and the ability to compare various banking
products.
New digital finance ecosystems
(e.g., WeChat, AliPay) are
emerging in China, based on
data-sharing capabilities.
In East Africa, new In South and Southeast Asia, FinTechs
under-writing models are are experiencing strong growth around
emerging from access to APIs and data sharing. Examples
alternative sources of data, include mobile wallet growth in India
like mobile phone usage. after demonetization and formal
Examples include M-Shwari, FinTech governance at the Monetary
Tala and Branch. Authority of Singapore.
3
 In Australia, the government recently released the The impact of regulations such as PSD2, and
findings of its review into open banking. The report continued compression of interchange fees, means
concludes that an open banking system in Australia that issuing and acquiring institutions in particular
should be customer-focused, efficient and fair, need to look at other forms of revenue growth as
encourage competition, and create opportunities for traditional revenue streams are threatened. PSD2
new ideas and businesses to emerge and grow. eases the path for new entrants moving into the
market with digital wallet and banking solutions that
Monitoring the success or failure of the system
will further threaten bank margins and lure customers
through a U.S. lens will be interesting given that
away. Also, there is evidence of an increasing number
the move to open in the U.S. is not mandated by
of cooperation agreements/joint ventures between
regulation. Having been introduced as a means to
different actors, including non-financial/non-regulated
break down the competitive advantages that banks
actors for the use of Big Data (e.g., the recent Intuit
have long enjoyed, open banking will undoubtedly
data sharing partnerships with Wells Fargo, Chase,
support an emerging market of new third-party
Lloyds and HSBC).
products and services, and increase competition
for banks to create net-new value propositions and While financial institutions have always used data,
offerings. the type and sources of data, as well as the use of
data analytics tools, is growing exponentially. The
OPEN BANKING FACILITATES BIG DATA USE BY
penetration of technology-driven applications in
FINANCIAL INSTITUTIONS
almost every segment of the value chain of the
Data is fast becoming the most valuable asset for all
financial services sector has accelerated the pace of
financial institutions in the race to bring new services
change at a remarkable rate. The Payments Systems
to market, compete effectively and stay one step
Regulator (PSR) in the U.K. recently examined how
ahead of growing regulatory pressures. In addition, the
payments data is currently collected and processed
proliferation of connected devices (e.g., the Internet of
in a typical transaction involving interbank payment
Things) has allowed data to be generated, collected,
systems, card payment systems and ATM transactions.
stored, processed and used at unprecedented rates.
The PSR identified a number of points in the
Big Data encompasses not only the transactional data
transaction chain where data could be used to add
but also the ability to process and analyze metadata
value to commercial products or improve services. For
to unlock potential income-generating insights by
example, this could be done by:
revealing patterns or correlations to predict future
events. The latter holds the greatest promise for • Selling the raw data itself to other entities
financial institutions, as there is more scope for value-
• Analyzing the data and generating insights
added, revenue-generating services to be developed.
• Applying insights from the data
Financial services are inundated with data and
products of all kinds, but when properly applied, Big Various types of consumer data are collected and
Data and analytics can positively impact a variety of used by firms. These include ID or contact details,
services, including: browsing history, log data, professional data, personal
interests, financial and payments data, consumer
•S
 egmenting customers
complaints or queries, social network information,
•C
 ustomer loyalty management (including monitoring driving and location data, information from store
consumer sentiment towards products and cards/credit cards, data collected for suitability
institutions) assessments or data collected for creditworthiness
assessments. At the same time, it is important to stress
•C
 reditworthiness assessments
that data sources are expanding exponentially, and
•M
 arket segmentation and campaign targeting certain institutions appear to already have access to
an increasing set of sources. In addition, it is widely
•D
 ynamic pricing
accepted that data obtained from connected devices
•U
 nderwriting risk, fraud prevention and anti-money and sensors will be used more and more.
laundering

•P
 ersonalized experience

•T
 ailored individualized offerings, incentives and
rewards

4
THE NATURE OF OPEN BANKING WILL CHANGE market to provide consumer and business data in real
THE NATURE OF COMPETITION time and in standardized formats, in much the same
Retail customers tend to choose banks for relatively way as the PSD2 requirements apply to payments
arbitrary reasons, then stay with them for years. data for banks.
According to the CMA in the U.K., only 3% of people
INNOVATE TO DIFFERENTIATE
switch to a different bank each year, despite the
For incumbents, the die has been cast. Many are
current account switch guarantee the government has
making important decisions to innovate and foster and
in place to help the transition. It’s still inconvenient,
build partnerships. Given their large and relatively loyal
perceived as admin-heavy and there is little in the
customer bases, banks have a significant advantage
way of incentives to compensate. As a result, banks
in that they can leverage data to innovate, providing
haven’t had a reason to date to deliver better products
better customer experiences built with partnerships.
or lower prices, which in the end means that the
customer loses out. A December 2017 survey by consultancy Accenture
found that merchants could “become the new face
However, banking solutions of the future will be
of everyday financial transactions” in the PSD2
influenced by how they benefit the customer and meet
environment. As part of the study, Accenture surveyed
their evolving demands and preferences, as well as
nearly 80 payment executives at large merchants
the societal impacts these new services will have. If
and banks across Europe to determine how they will
one or more of the world’s IT giants decides to fully
respond to PSD2. The research found that nearly
enter the payments arena, utilizing its access to the
90% of the merchants surveyed will be able to plug in
customer interface and customer data, the effects
directly to banks to obtain consumer information and
could be profound. Google, Apple, Facebook, Amazon
initiate payments by 2019.
and Alipay all have access to vast data on customer
behavior, needs, interests and movements, which Merchants also expect open banking to drive
could instantly make them relevant in any customer significant in-store innovation. The APIs that
payments offering or journey. merchants cite most often as ones they plan to embed
into their existing POS channels (enabling consumers
Banks also have plenty of customer data but have
to access information directly from the merchant)
not made valuable use of it or harnessed its potential.
are bank account balance display (cited by 67% of
Among FinTechs, we may find brilliant ideas and new
respondents), payments initiation (63%) and bank
concepts, but without the interface or data from a
account transaction history (60%).
significant customer base, it will be hard for them to
gain traction and scale. Sophisticated multi-national merchants stand to
gain considerably from the benefits of PSD2, open
Third-party players may themselves have diverse,
banking and real-time payments. These corporations
often structured, data sets as a result of the digital
can process millions of transactions per day globally
services they provide. Yet they do not have the same
across multiple retail channels and currencies. The
regulatory obligations imposed on banks to provide
standardization offered by PSD2 will considerably
access to third parties. Access to rich data, which
improve straight-through processing rates. This applies
customers might have generated in a large variety of
not only to the basic payments information, but also
digital firms, would allow financial firms to compete
to customer data that can be leveraged to develop
on a level playing field and to better meet the
more tailored solutions.
expectations of customers, regulators, policymakers
and supervisors.

In fact, the European Commission is already

considering a proposal to regulate platform-to-
business relationships as a first step towards
establishing transparency in the relationship between
online eCommerce platforms, social networks and app
stores with their business users. To address underlying
asymmetry issues in data access, the Commission may
also consider the development of requirements that
will oblige firms that are critical to the digital single
2 REAL-TIME
PAYMENTS
As competitive and regulatory pressure intensifies
globally, financial institutions are fast realizing that
they need to transform their payment systems to drive
down costs and consolidate redundant functions. Add

5
 to this the consumer demand for speed, convenience
and simplicity with payments and it is clear why there
has been such a push to real-time payments around
the world.
Within a decade, real-time, 24x7 payments have
emerged as the main driver of innovation in payments,
and the technology has become the norm in many
parts of the world. Drivers of these payment schemes
vary; the U.K.’s scheme was a result of regulatory
pressure, while a commercial imperative (including
competition from telcos) drove developments in
the Nordic countries. Elsewhere, a mix of regulation
and commercial drivers has played a role. Payments
infrastructure upgrades now inevitably include a
real-time payments element. In the U.S., The Clearing
House has rolled out the country’s first new payments
system in 40 years — a clearing and settlement system
to support real-time payments. Similarly, the European
Banking Association’s RT1 pan-European SEPA Instant
Credit Transfer-based scheme went live in November
2017.
To provide ubiquity, real-time payments must support
all payment types — including P2P, B2B, B2C and
C2B. In the P2P instant payments sector, a consortium
of U.S. banks launched Zelle as a response to other
providers in the sector. National P2P schemes across
Europe (e.g., Swedish “Swish” and Norwegian “Vipps”)
are also gaining significant traction. All of this creates
great opportunity and choice for consumers but
adds complexity and additional layers of technology
that need to be supported by banks, businesses and
merchants.
THE BUSINESS CASE FOR REAL-TIME PAYMENTS
In practice, and in common with most if not all
infrastructure developments, the business case for
real-time payments will be realized over the long
rather than short term. While connectivity to real-time
schemes is relatively straightforward, the demands
of real-time processing touch many aspects of the
financial institution previously managed with batch
processes. While initial costs are mainly related
to integration and testing, the ongoing costs of
maintaining these links must be considered. The
fragmentation of real-time payments schemes is a
challenge, and interoperability between schemes will
become increasingly important as more are rolled out.
Steps are being taken to address this by the European
Automated Clearing House Association (EACHA),
which published an instant payments interoperability
framework that provides the technical basis for
interoperability between the different Euro instant
payments services. In addition, scheme operators
are working closely together to maintain standards
of consistency to eventually facilitate cross-border
interoperability.
Fragmentation across payment systems is also being
tackled. For example, the U.K.’s Payments Strategy
Forum proposed consolidating the country’s three
payment system operators — BACS, Cheque and
Credit Clearing Company, and Faster Payments — into
a single entity. The mandate has now passed to the
New Payment System Operator (NPSO), which will be
responsible for developing a payments architecture
that is simpler, more accessible and more responsive
to innovation.
In addition to the technical changes that will be
required to move to 24x7, real-time payments, banks
in particular will have to change operational processes.
Moving away from a batch payments environment
will be a challenge. Each bank must work out how
it will provide a 24x7 service, and crucially, how it
will manage liquidity, risk controls related to fraud,
sanctions and anti-money laundering. This will require
different skills, capabilities and management of data to
cope with a change that has many dimensions across
a bank’s business and technology environments.

6
Banks are trying to build various features in real-time
payments systems to tackle the competition from non-
banks in different areas, including P2P, B2B, B2C and
C2B transactions. These services must also be fast,
secure and available around the clock.
Businesses can use real-time payments for functions
like hourly payroll disbursements and just-in-time
inventory management. Real-time payments enable
more data to be carried with the payment, which
facilitates improved reconciliation and reporting. As
mentioned above, this is where the real value lies.
Banks can offer enhanced services related to this data
and improve cash management services, including
more cost-effective options for speedy disbursements
of funds, which help businesses manage their liquidity
positions in the entire financial supply chain more
efficiently.
Banks can offer trusted real-time payments solutions
to merchant and corporate customers by enhancing
access channels for online and mobile devices. This
gives them an edge over non-banks in efforts to
attract more customers to use their service. In turn,
consumers can access real-time payments to purchase
from businesses. Where issues arise, refunds can
be credited back into consumers’ accounts quickly,
providing enhanced customer service levels.
LIQUIDITY MANAGEMENT FOR MERCHANTS
The growth of online commerce has also had an
impact on demand for real-time payments. Customers
used to unfettered access to the internet and the “one-
click” purchases of online shopping expect payment
choices when purchasing goods and services. There
is also the strong argument that real-time payments
greatly benefit small- and medium-sized enterprises
by freeing up cash flow, especially when coupled with
eInvoicing. In addition to payments assurance and
lower fees for transactions, many small businesses
and large merchants alike are looking at real-time
payments to enhance their cash flow management,
reduce fraud activity and provide incremental value to
their customers.
Crucially for merchants, accepting credit card
payments is costly. Real-time payments, however,
are a much less costly option and do not penalize
the merchant, who is essentially paying for customer
acquisition.
Bank transfers, rather than credit card use, may be
encouraged in the future as merchants grapple with
fraud, authentication and data security issues. This
cuts out the middle man, provides direct access to
valuable transaction data and may even lead to a
better relationship with customers as a reduction in
credit card fees allows for reduced pricing for those
willing to forgo their cards.
Ultimately, real-time payments act as a springboard
for innovation — mobile, eInvoicing and eCommerce
payment solutions are all enabled by real-time
payments systems. At a time when brick-and-mortar
merchants around the world are struggling against
increased online competition, the impact of real-time
payments cannot be understated.
ENCOURAGING NEW ENTRANTS TO THE MARKET
Technological advancement has created opportunities
for non-banks to enter certain areas in payments
where banks have often not played a role. Consider
the payments value chain, which can be broadly
divided into five phases: pre-transaction, authorization,
clearing, settlement and post-transaction. Non-banks
have increased their presence in all phases of the
payments value chain except the settlement phase,
which is still core to banks’ activity.
A prime example is PayPal, where a person can store
credit card information and other details by opening
an account. Each time the person wants to transfer
money or carry out an eCommerce transaction, they
can do so using their PayPal account and password,
without keying in credit card details. There is also no
need to go to a bank website for initiating a payment;
PayPal completes the authorization and settlement
offline for the customer.
Another example is proximity payment, like Apple
Pay, which lets Apple devices wirelessly communicate
with point-of-sale (POS) systems using near-field
communication (NFC), a dedicated chip that stores
encrypted payments information (known as the secure
element), and Apple’s Touch ID and Passbook.
However, while the use of alternative payments is on
the rise, they also have several shortcomings. Although
they are simple to use and have funds verification, they
are expensive and settlement can take several days.
In addition, since accounts are funded by account
payments or through an automated clearing house
(ACH), this payments method relies on traditional
payment networks to operate. Card payments are
quicker and have positive fund verification but are
also costly, and businesses are hindered by
government regulations. ACH payments are
inexpensive and scalable, but ACH networks lack
instant fund verification and settlement can take days,
increasing the risk of non-payments for merchants and
other billers.
7
 This builds the case for real-time payments, where
customers have direct control over their money and
there are not pools of unused liquidity. Consumers
and businesses pay directly from their accounts.
This payments method is inexpensive, quick,
secure and has instant positive funds verification
and confirmation. It helps merchants reduce their
interchange costs, and helps banks maintain their
direct relationships with customers. Most importantly,
it is aligned with consumer expectations in today’s
immediate access, “always on” world.
3
MANAGING
COMPLEXITY AND
MODERNIZATION
The need to become and remain competitive is a
serious challenge, especially for the banking industry,
which is saturated with providers, products and
services — particularly in the retail, small business,
corporate and wealth management sectors. Even
investment bankers are up against stiff competition
from digital rivals. The financial services market has
always been a competitive business, but established
players are finding it even harder today to differentiate
themselves from the steady trickle of new entrants.
PUTTING CUSTOMERS AT THE CENTER OF
EVERYTHING
There are several ways for banks to become more
customer-centric. They include collecting more
accurate and timely customer information (and
managing it better); improving operational efficiency;
providing a more attentive, personalized service;
integrating multiple delivery channels and bringing
new services to market more rapidly.
Even though customers regard quality of service
as the most important aspect of their banking
experience, they also value relevant, competitively
priced and innovative products, and effective delivery
channels. The challenge for banks, therefore, is to keep
abreast of developments in these two areas.
To meet the multitude of challenges they face,
banks need to modernize their business strategies
and operating models. There are a number of
modernization strategies to consider: become more
customer-centric, update products and channels,
differentiate from the competition (not just in terms of
8
services, products and channels, but also in pricing),
partner with intermediaries, evolve brand and image,
adjust the risk appetite and integrate risk with finance,
find new and affordable sources of capital and
liquidity, and concentrate on business lines that are
core to the company.
All business units need the right IT support, but
expense is an inhibitor, and market and regulatory
changes are additional complicating factors. Banks
that have recently undergone mergers have particular
problems in integrating disparate systems into one
“ready-for-the-future” system. One bank’s meltdown of
its new IT system in April 2018 locked out two million
customers from online and mobile bank accounts for
over a month before the bank could get a grip on
the problem. Only by drafting in a team of experts
from IBM, recruiting 1,800 additional employees and
redeploying 700 staff to customer support roles,
was the bank able to get the situation under control.
Around 26,000 customers have since switched bank
accounts and the bank has been left with a bill of more
than $230 million for customer compensation and
waived overdraft fees and interest charges, and now
faces the prospect of hefty regulatory fines.
There are two key stages in IT modernization. The
first is to integrate the legacy systems and software,
which is where the bank in the above example failed.
The second is to devise new IT architectures, buy in or
create new software, and embrace innovations such as
cloud computing.
Many banks still have their products, channels and
lines of business in silos, or they are only partially
integrated. Non-integrated systems prevent them
from having a critical enterprise-wide view, hamper
organization-wide efforts to improve customer
experience and impair the ability to adequately
monitor operational activities. To break the cycle,
banks need to introduce applications that are service-
oriented and standards-based, which are easier to
integrate with other applications.
In particular, cloud adoption allows for a reduction
in the need for software and additional computing
power, thus saving on capital investment and reducing
IT complexity. There is no need to maintain or update
hardware, software or services, as the provider does
this. The services provided are generally better, faster,
more flexible, more scalable and more reliable because
they are provided by dedicated organizations that are
experts in delivery of payments infrastructure.
REGULATORY COMPLIANCE
Banks must apply new and innovative measures to
prevent and detect fraud, not only to cut down on
losses, but also to satisfy the authorities that they
are not encouraging fraudsters. These measures
can only be carried out effectively if they have
fraud management software with a wide range of
features, including real-time detection and correlation
capabilities, sophisticated behavior detection and
analytics.
With the entry into force of all accompanying
guidelines and the regulatory technical standards for
strong customer authentication, banks will be subject
to the operationalized PSD2 by the end of 2018,
obliging them to provide customer data to all licensed
competitors, in digital form and free of charge. Big
techs, on the other hand, have to observe the GDPR
only and will retain economic sovereignty over the
personal data of their customers.
Banks will also need appropriate anti-money
laundering and combating the funding of terrorism
(CFT) monitoring processes in place if they process
transactions on behalf of FinTech companies’
customers. If the customer makes payments with a
bank card or account, the bank currently has some
level of responsibility for authenticating the customer
and may be responsible for covering fraudulent
transactions under several regulatory regimes.
The higher level of automation and distribution of
the product or service among banks and FinTech
companies can result in less transparency on how
transactions are executed and who has compliance
responsibilities. This can increase conduct risk for
banks, as they may be held accountable for the
actions of FinTech partners if a customer suffers a loss
or compliance requirements are not met.
ARTIFICIAL INTELLIGENCE/MACHINE LEARNING/
ADVANCED DATA ANALYTICS
Artificial intelligence makes advanced analytical
tools that, by leveraging the capability to process
large volumes of data, support innovative solutions
for business needs. This capability enables the
development of multi-channel customer access,
increased self-service by customers, ability to
gain greater insight into customer needs and the
provision of more tailored or customized services.
Many FinTechs have leveraged these capabilities to
provide data collection, aggregation and storage
services, advanced data analytics and personal finance
management directly to customers. In modernizing
and digitizing incumbent banks, most of these services
support scenarios where the use of advanced data
analytics to research customer needs provides real-
time service delivery, enhances risk management and
can significantly improve the bottom line. FinTechs
based on data aggregation business models monetize
customer data and use this data aggregation to gain
an in-depth knowledge of their users (through search
history, personal data and preferences shared on social
media, consumption and spending habits, etc.) and
tend to compete directly with banks for ownership of
the customer relationship.
MERCHANT INVESTMENTS
REQUIRED FOR MODERNIZATION
The pace of change in the payments industry is rapid,
and merchants must continue to develop their core
payments infrastructure to remain competitive and
position themselves for growth. Modernizing the
middle and back office is certainly important, but
this modernization process must also extend to fraud
solutions and omni-channel payment options.
The term omni-channel may be overused, but few
would deny that a coherent omni-channel strategy
is a fundamental business aim for forward-thinking
merchants. Today’s customers are looking for seamless
shopping experiences, regardless of whether they are
browsing the web on their tablets, using a merchant’s
app on their smartphone or visiting the retailer’s local
branch. In a networked world, consumers have access
to a huge amount of information and enjoy an equally
vast selection pool. As a result, merchants need to
be aware of what consumers expect and improve
processes accordingly. Increasingly, an omni-channel
commerce strategy that combines both online and
offline channels is vital to building a truly seamless
shopping experience.
Enabling mobile payments is a natural part of the
customer “digital experience factor” and not just a
cost of doing business. Advanced merchants and
corporates are now realizing that a digital payments
infrastructure is vital, not just for influencing
conversions and returns, but for actually reducing
costs of operation and creating new consumer
insights.
In addition, as merchants start providing augmented
reality (AR) assisted shopping experiences, they will
likely look for an AR-integrated payments gateway
that delivers a superior customer experience, adding
further complexity to their already burgeoning IT
deployments.
9
 class and favorable government policies (e.g., India).

4
Regulation is also working on loosening the grip of
banks and opening the market to more competition,
although we may see more supervision, or even
GLOBALITY regulation, of platform companies as they become
ever more critical to consumers and businesses alike.
Digitalization and standards such as ISO 20022 will
For traditional banks and even platform companies,
inevitably pull all parts of the financial community
the need to provide real-time, cross-border, universal
together. However, fragmentation and legacy will still
payments has led to more outsourcing due to tie-ups.
be a limiting factor to globality for years to come.
THE EXPANSION OF ASIAN GIANTS
Alipay, Amazon, etc., because of their relative size and
AROUND THE GLOBE
reach, impose their own globality conditions onto the
Alipay, Tencent, Paytm and PayU have accelerated
regions of the world in which they operate. In the case
the shift to digital payments in emerging markets.
of Alipay, this allows Chinese tourists traveling abroad
Alipay and Tenpay are dominant names in China that
to use their payment apps as they would in their home
are aggressively expanding overseas, while PayU
market. Similarly, Amazon creates its own ecosystem
and Paytm build new ecosystems amid digitalization
of seller communities with a uniform distribution and
of cash in emerging markets. Alipay’s role as the
payments system so that they can operate across the
payments infrastructure of Alibaba (and Ant
world. Amazon Web Services (AWS) is also providing
Financial’s ecosystem) differentiates it as being more
the cloud infrastructure for a high portion of the new
commercially relevant than competitive offerings.
FinTechs that are challenging traditional operating
Alipay has pushed its offline applications into more
models, especially those based on international money
use cases, including public transportation and small
transfers, cryptocurrencies, wealth management,
offline merchants (with free QR-code payment) and
insurance, micro finance and aggregation services.
has payment partnerships in over 110 countries.
By contrast, banks, credit card companies and
Tenpay is Tencent’s third-party payments platform.
traditional banks have built around themselves a
It provides technical infrastructure support for
complex web of island standards, networks and
WeChat Pay and QQ Wallet, two products based
operating processes, either intentionally or because of
on Tencent’s dominant social and communication
regulation, that have until recently actively inhibited
platforms, WeChat and QQ. Tenpay has a 25%1 share
globality. This has helped FinTechs, many of which
in China’s third-party payments market, second only
have based their businesses on breaking down these
to Alipay. Tenpay’s key advantage lies in the ubiquity
silos and barriers (e.g., TransferWise and Revolut).
of Tencent’s social and communication assets, which
A decade after the great financial crisis, banks still underpins its strong performance in mobile and offline
struggle with innovation and speed, but they can payments.
either create innovation themselves or do so by
Chinese consumers that use Alipay or Tenpay do not
partnering or acquiring new entrants. However, when
have to pay with a credit card. These services provide
the new entrant is a big tech, the equation changes
interest-bearing escrow deposit accounts that allow
as the likes of Google, Amazon, Facebook and Apple
consumers to circumvent the card networks entirely.
come to the party with pre-existing scale and client
If Alipay or Tenpay were to make significant inroads
reach, sometimes greater than the banks themselves.
in the U.S. and Europe, this could be a competitive
These internet-based platform companies have threat to Visa and Mastercard. However, these Chinese
captured an ever-increasing share of consumers’ payment providers would have to address three main
time and attention. They also view payments and obstacles:
financial services not as an end, but as a tool to
•R
 eceiving bank-related regulatory approvals to offer
further enhance client stickiness, and they monetize
deposit accounts in each country of operation
via advertising, eCommerce or other services (such
as AWS). And when these platform companies have •P
 roviding additional incentives to win consumer
gone into payments and finance, mainly in emerging wallet share, as card issuers (particularly in the
markets so far, they have gone big. Finance is being United States) offer more compelling rewards
re-imagined and re-created in emerging markets with programs than those in China
the proliferation of mobile platforms, a growing middle

10
•A
 chieving high levels of merchant acceptance
needed to make these forms of payment as
convenient as cards are today
INNOVATIVE ALTERNATIVES TO CARDS
Swedish firm Klarna is simplifying online checkout
by expanding the traditional payments gateway to
include consumer credit. With Klarna, the shopper
no longer has to provide payments information at
checkout and can receive the product before paying
for it. Klarna also offers installment loans to customers
during checkout. The fact that consumers pay after
delivery is a key aspect of Klarna’s appeal, which can
facilitate its growth. As more online shopping is done
on the phone, consumers are demanding easier and
more secure checkout. With Klarna, consumers do not
need to provide sensitive payments information when
purchasing items in crowded public places and do not
need to remember another username and password.
Second, shoppers do not have to pay until the
goods are delivered, obviating delivery and quality
assurance concerns — which is especially important
when shopping across national borders. Again, Klarna
appears focused on international growth, making two
acquisitions to gain scale in Germany and launching in
the U.S. market two years ago. Klarna also streamlines
the payments process for merchants by providing
a single integrated solution with a single technical
integration, one agreement and one customer support
team. Its platform partners include the likes of Shopify.
Despite much publicity upon launch, Apple Pay,
Samsung Pay and Android Pay have been slower to
gain traction. Apple Pay has the highest penetration
(in part because it launched nearly a year earlier) and
is seeing the most growth (albeit off a small base),
with transaction volume rising as the service expands
its merchant and user bases. Despite this, one-third of
the biggest 100 merchants in the U.S. do not accept
Apple Pay (including merchants like Walmart, which
has opted for its own digital wallet solution, Walmart
Pay). Also, consumers fail to see a clear advantage
in terms of ease of use relative to traditional cards
(particularly contactless) with few or no additional
incentives to use mobile wallets.
Source: Goldman Sachs, Payment Ecosystems, August 2017
1 
By contrast, consumers choose their mode of payment
based on incentives, which has been the case with
credit card rewards programs driving incremental
credit card spend, and loyalty programs linked to
digital wallets at merchants such as Starbucks and
Dunkin’ Donuts driving mobile app usage.
THE NEED FOR FRICTIONLESS
UNIVERSAL PAYMENTS
With so many payment options, differing regulatory
regimes and the unpredictability of FinTech disruptors,
frictionless payments have dented the lucrative lines
of businesses that were once exclusive to traditional
banks. Convenience and speed have become
consumers’ universal baseline expectation for their
payments experience, as they expect to be able to
pay for just about anything, anytime, anywhere. They
can order ahead and pay at restaurants, request a ride
home in a matter of minutes or purchase a last-minute
gift to arrive promptly on their doorstep that same day.
Payments technology continues to rapidly evolve to
meet these increasingly sophisticated and immediate
consumer demands. New innovations like voice
payments, contactless cards and wearables are
intended to make electronic payments even easier
and more frictionless. For all players, this will require
new strategies that leverage existing assets married
with new technologies to deliver experiences that
define consumers’ behaviors, all while being open to
partnerships once believed unthinkable. The payments
ecosystem has grown far beyond banks or traditional
processors to include merchants, payment gateways
and just about any organization that can facilitate
payment for goods and services via their own app.
Today’s consumers expect any mobile, social or
physical commerce experience to seamlessly integrate
with their smartphone at kiosks, ATMs or online.
Constant introductions of new payment technologies
require increased agility from all payment providers
that want to maintain a competitive advantage.
Above all, it is important to recognize that time is a
precious currency and acknowledge that consumer
convenience, throughout history, has driven
disintermediation and defined innovation across all
sectors.
11
 ACI Worldwide®, the Universal Payments®
(UP®) company, powers electronic
payments for more than 5,100 organizations
around the world. More than 1,000 of
the largest financial institutions and
intermediaries, as well as thousands of
global merchants, rely on ACI® to execute
$14 trillion each day in payments and
securities. In addition, myriad organizations
utilize our electronic bill presentment
and payment services. Through our
comprehensive suite of software solutions
delivered on customers’ premises or
through ACI’s private cloud, we provide
real-time, immediate payments capabilities
and enable the industry’s most complete
omni-channel payments experience.

LEARN MORE

WWW
WWW.ACIWORLDWIDE.COM

@ACI_WORLDWIDE

CONTACT@ACIWORLDWIDE.COM

Americas +1 402 390 7600

Asia Pacific +65 6334 4843
Europe, Middle East, Africa +44 (0) 1923 816393

© Copyright ACI Worldwide, Inc. 2018

ACI, ACI Worldwide, ACI Payment Systems, the ACI logo, ACI
Universal Payments, UP, the UP logo, ReD, PAY.ON and all ACI product
names are trademarks or registered trademarks of ACI Worldwide,
Inc., or one of its subsidiaries, in the United States, other countries or
both. Other parties’ trademarks referenced are the property of their
respective owners.

ATL6710 08-18

12